The latest report by The Southern African Venture Capital and Private Equity Association (SAVCA), titled the SAVCA 2020 Venture Capital Industry Survey has revealed that the local venture capital landscape experienced record investment and exit activity in 2019.
According to Investopedia, an exit refers to when an investor, trader, venture capitalist, or business owner decides to liquidate a position financially when their financial goals or aims have been met or exceeded.
Although local venture capital investors may have experienced a significant slowdown in deal activity due to the impacts of Covid-19, the report indicates that a total of 38 exits took place in 2019.
According to SAVCA, this number is more than double the previous record for annual exit activity and nearly over triple the nine exits reported in 2018.
Tanya van Lill, CEO of the Southern African Venture Capital and Private Equity Association (SAVCA), says that this record exit activity bodes well for the development of the industry.
“Notably, of the 38 reported exits, 50% were reported as profitable, with a total amount of R830.5-million returned to investors. Trade sales remain the most prevalent exit route, followed by exiting to other investors,” she adds.
Impact of Section 12J
Aside from a record exit activity reported, the data gathered by SAVCA’s report has revealed that there was significant investment activity. According to the report, the 2019 VC investment showcased the highest activity to date, both by investment value and the number of deals secured.
“This was the second consecutive year that the total value of VC deals exceeded R1 billion, with 2019 deals amounting to R1.23 billion – a notable increase of 14.8% on the 2018 deals reported (20.9% by the number of deals).”
This, van Lill says, continued the upward trend in investment activity that started after 2015, when changes were made to Section 12J.
“Independent VC fund managers continue to comprise the largest share of active portfolios (38.1%), with Captive Government Funds and increasingly Captive Corporate funds playing a more significant role to fuel the growth of early-stage investments in South Africa.”
Additional data attributes
The latest report by SAVCA introduced additional data attributes with the aim of more accurately differentiating between deals that involve secondary assets, such as investments into buildings and land along with deals which are defined as ”’Venture Leasing”.
“In both instances, investors are able to hedge investment risk by relying on the underlying value of the asset, and even if the actual business seizes to operate, the original capital invested into such assets can be recovered. For this reason, survey respondents were asked to reclassify their investment portfolio to ensure the SAVCA VC Survey captures traditional early-stage investments. In future studies, we may start reporting on these numbers given the significance it has in financing start-ups,” van Lill explains.
The report has revealed that two provinces dominate the investment landscape, namely Gauteng and the Western Cape.
While funding into Western Cape-based businesses grew by 21.8% in 2019 compared to 2018, van Lill points out that Johannesburg was still listed as the head office location for most VC fund managers – marginally higher than Cape Town.
In terms of funds under management on a sectoral level, manufacturing accounted for the largest share of active deals (13.8% by value), followed by the Food and Beverage sector (12.7%) and Business Products and Services (10.9%), despite deals in the Food and Beverage sector receiving most of the investment in 2019 (14.2%), followed by Agriculture (10.9%).
Noting that agriculture does not typically feature amongst the top sectors of VC investments, van Lill explains that recent investment activity by several VC fund managers into an AgriTech business has raised the profile of the sector.
“This is an example of how sector-based preferences fluctuate from year to year, with Energy in 2019 making up a smaller share of VC focus due to the survey’s reclassification of deals involving asset leases.”
While acutely aware of the challenges that the industry is currently facing due to COVID-19, van Lill says she is encouraged by the significant growth of VC investors and early-stage deal activity reported in 2019.
“There is no doubt that the current health and subsequent economic crisis will reflect in next year’s results, however, we can find some solace in this year’s results, which suggest a strong foundation and an overall positive outlook of the VC industry,” she concludes.
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