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CIARAN RYAN: You might think that dealmaking happens only with companies listed on the stock exchange, but that’s not the case. A steady stream of transactions is taking place among privately owned, founder-led and family-owned businesses.
These deals are attracting growing interest from private equity funds, family offices, boutique investment firms and strategic trade buyers.
This shouldn’t surprise us as many mid-sized – or what are known as mid-corporate – businesses are entering a new phase of growth, or they’re undergoing succession planning and ownership transition.
Well, to explore this, we’re joined now by Greg Campbell, head of Leverage Finance at Nedbank Business and Commercial Banking. Greetings, Gregory. Thanks very much for your time.
It’s not just the large listed companies that are doing deals, is it? It’s also happening at the mid-corporate level. So maybe explain why this is. And we discussed this before, but how do you define a mid-corporate business?
GREGORY CAMPBELL: Ciaran, good day and thank you for the time. It’s great to chat about the mid-corporate business in the South African context.
Just to look back and ask, ‘Well, what is a mid-corporate business?’ – traditionally, we would see them as family-owned businesses or businesses that are not listed on the JSE.
Over the last five years, probably since the Covid-19 era, what we’ve observed is clients, companies and businesses that have started to really scale and grow within the domestic environment.
We’re seeing businesses now get to a scale of R5-750 million worth of turnover, with a key financial metric that we always look at – where Ebitda [earnings before interest, taxes, depreciation, and amortisation] is circa R75 million and upwards.
So two key points – circa R750 million annual revenue, and typically businesses that are not listed on the JSE.
CIARAN RYAN: Okay. Now let’s talk about why we are seeing deals happening at the mid-corporate level, not always happening at the stock exchange level.
GREGORY CAMPBELL: Correct. I think this is where domestic financial institutions see immense opportunity in the unlisted market, the family-owned businesses, businesses that are on our scale.
They are meaningful businesses. I think at the upper echelon you would probably see thresholds of turnover sit north of R5 billion and, commensurately with Ebitda levels, 10% or 15% of that.
These are businesses of some scale that you would, on any day of the week, put on the JSE. However, many of these entrepreneurs have no interest or appetite to be on the JSE yet.
These are businesses that become very attractive – not only to the traditional private equity cadres but also to family offices and investment holdcos [holding companies] looking, whether through a transformation play or purely to bolt them onto another asset, where there are adjacent synergies to be extracted.
So it has become quite an attractive segment of the market and one that’s attracting a lot of capital from traditional players. But I would dare to say that what we’ve observed as well, over the last two to three years, is we’ve seen quite a lot of foreign money coming into South Africa.
There is interest in these private companies, more because of the legacy that they’ve developed over time.
They’re fairly strong in terms of size and scale, and that always can be an opportunity for a foreign investor acquiring a business with some strong IP [intellectual property] and intellectual capability to actually bolt it onto their global networks.
Now, you might think of global networks and multinationals, but there are many unlisted companies around the world that are very active. They are also looking for acquisitions within South Africa.
CIARAN RYAN: I find it interesting that there is this level of interest from local and foreign capital in the mid-corporate market. I guess one of the reasons is that you have faster growth potential with these businesses.
Is that correct, or are there other reasons as well why investors would be interested in this segment of the market?
GREGORY CAMPBELL: I think there are a couple of elements to it. I think it’s because they are businesses of some scale in the domestic market.
I think they have very strong management teams built up over time, and they’ve been through the difficulties in South Africa from a trading point of view. It’s not one of the easiest environments to trade in, so they are very resilient businesses.
They are fairly niched in the South African economy.
And I think, as foreign investors look at these entities, they are always carving in a component of the equity stack – in which management is a participant – to ensure that there’s complete alignment in these businesses.
So, at the end of the day, these businesses continue to scale and grow organically in South Africa.
But where they do benefit, particularly from an investor who brings in tighter governance and tighter management controls, is because traditionally many of these businesses are entrepreneurially driven and are now reaching a stage where more formal governance structures can support their next phase of growth.
But we do see private-equity firms bringing an element of control into these businesses such that when they eventually do take a decision to exit – because many investors choose to exit at a point in time – some are patient with their capital, wanting to spend longer in and continue to scale and grow the business.
But overall, at the end of the day, these businesses have remained very resilient since Covid-19.
CIARAN RYAN: Greg, is there any evidence that certain sectors are doing better in attracting this investment capital – for example, mining or supply chain or manufacturing services? Any particular segment doing better than others for deal-making?
GREGORY CAMPBELL: I think it’s a little across the board. We’ve seen it in mining services; we’ve seen a bit in retail. We’ve even seen it in management software consulting businesses that are looking to scale and grow and go beyond the South African borders.
But the traditional mining [and] the manufacturing segment do provide great opportunity. We’ve also seen it in some of the subsectors in agriculture. We’ve seen it in primary agriculture, beef production. We’ve seen it there. so it’s across the board.
I think what we are not observant of in South Africa [is that], while we look at the JSE and all the companies there that are very visible, below the surface in this mid-corporate segment of the market there are exceptionally strong businesses of scale that have been built up over many, many years, in which family shareholders continue to remain and want to remain and build out their legacy.
I think we all know that this segment of the economy, while unobservable, does employ a lot of people; and I think overall it creates a great platform for the South African economy for support into these smaller businesses, but businesses that have some scale to them.
CIARAN RYAN: Another issue that’s obviously driving deal activity is this founder succession. You have people who founded the business, are getting near retirement and want to pass on the reins to somebody else. How big an issue is this in the mid-corporate market?
GREGORY CAMPBELL: It is quite an issue. As we look back over time – I’m a banker of many years – we’ve walked a pathway with many founder-owned businesses – and I’m talking business with 30, 40 years of trading in South Africa.
These businesses, as I’ve indicated, are of some scale. Many of these shareholders have, over time, enjoyed the success of their business, but have not yet, in consultation with their advisors, embarked upon a pathway directed towards a structured exit of their equity interests in their business.
And where we sit in the mid-corporate market, we are in constant dialogue with many of these shareholders.
More recently, I was with a mining services company. It has more than R3 billion in turnover, significant Ebitda, and the shareholder is in his early 70s and hasn’t yet considered the implications and the opportunities and what needs to be done to exit his business over time.
That’s a massive opportunity for financial institutions – and not just banks and private investors or private equity or institutional investors. This is a massive opportunity.
A lot of these businesses have matured. They are very strong and have very strong management teams wrapped around them. So it creates a great opportunity on the one hand.
But we see in South Africa many of these shareholders just need a steady hand, a voice behind them, a trusted partner [with whom] they can walk a pathway through – whether it’s an initial partial exit to private equity or to family offices, or a substantial sell-down and holding a minority interest.
But at the heart of many of these businesses, the brand, many of these founder shareholders continue to want to ensure that they have an enduring legacy to leave behind over time.
And where we are in the South African banking industry – and I don’t just speak for Nedbank – many of the banks have partnered with many of these founder shareholders in successful exits over time, yet the brand name and the legacy continue in perpetuity.
CIARAN RYAN: Finally, Greg, the heart of the issue here is that a growing business needs capital. It needs some kind of structured leverage behind it. So talk about that and how Nedbank Mid-Corporate supports your customers in this mid-corporate market in that growth strategy or that transition strategy.
GREGORY CAMPBELL: Certainly. Nedbank Mid-Corporate is not unique. I think all the domestic financial institutions in South Africa have this capability.
I think what’s fundamental for us as you walk the journey of a potential exit, and what is immensely important is to ensure that the capital stack, the return on equity calculations, the structure – not just the senior debt, the mezzanine debt and indeed if there’s an equity layer that needs to go in – many domestic institutions are participating right up to the equity layers, even at the equity layers where there’s a requirement not to dilute investors but to come in with structured mezzanine debt that has equity-like attributes.
That capability exists in South Africa. So for us, when we look at the local market, a structured debt package – not just on the senior and the term finance but really looking across the other requirements of the business – does it have a longer-term capex cycle? Is there maintenance capex? Is there further capex to expand and grow? We know these are all growing businesses, so many shareholders are looking for certainty around their funding construct.
I think then, just lastly, when you look at the working capital dynamics of a business, every business does have working capital.
So when you are solutioning a particular company for its long-term capital financing needs, working capital is as important as the senior debt to facilitate a buyout – whether that buyout is through a management-led buyout or whether it’s just through leverage buying to support management to buy into the business.
So it is a complex set of considerations when you look at the funding of a business. But what we try and do in this mid-corporate space is to make sure that our teams on the ground are solutioning the client in a very holistic and sustainable fashion.
CIARAN RYAN: We’re going to leave it there. Thank you very much for that grand tour of the mid-corporate market, Greg Campbell, head of leverage finance at Nedbank Business and Commercial Banking.
Brought to you by Nedbank Mid-corporate.
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