The Private Equity Review - ENS

ThePrivate EquityReviewEditorKirk August RadkeLaw Business Research

The Private Equity ReviewReproduced with permission from Law Business Research Ltd.This article was first published in The Private Equity Review, 1st edition(published in April 2012 – editor Kirk August Radke).For further information please emailAdam.Sargent@lbresearch.com2

ThePrivate EquityReviewEditorKirk August RadkeLaw Business Research Ltd

PublisherGideon Robertonbusiness development managerAdam Sargentmarketing managerSNick Barette, Katherine Jablonowskamarketing assistantRobin Andrewseditorial assistantLydia Gergesproduction managerAdam Myersproduction editorJoanne MorleysubeditorCaroline Rawsoneditor-in-chiefCallum Campbellmanaging directorRichard DaveyPublished in the United Kingdomby Law Business Research Ltd, London87 Lancaster Road, London, W11 1QQ, UK© 2012 Law Business Research LtdNo photocopying: copyright licences do not apply.The information provided in this publication is general and may not apply in a specificsituation. Legal advice should always be sought before taking any legal action basedon the information provided. The publishers accept no responsibility for any acts oromissions contained herein. Although the information provided is accurate as ofApril 2012, be advised that this is a developing area.Enquiries concerning reproduction should be sent to Law Business Research, at theaddress above. Enquiries concerning editorial content should be directedto the Publisher – gideon.roberton@lbresearch.comISBN 978-1-907606-31-1Printed in Great Britain byEncompass Print Solutions, DerbyshireTel: 0844 2480 112

acknowledgementsThe publisher acknowledges and thanks the following law firms for their learnedassistance throughout the preparation of this book:Afridi & AngellA&L GoodbodyCarey y Cía, LtdaDarrois Villey Maillot BrochierENS (Edward Nathan Sonnenbergs Inc.)Gide Loyrette Nouel AARPIHengeler MuellerHortenKim & ChangKirkland & EllisKirkland & Ellis International LLPKirkland & Ellis LLPLabruna Mazziotti Segni – Studio LegaleLenz & StaehelinLexygenLoyens & Loeff, Avocats à la Couri

contentsEditor’s Preface................................................................................................viiKirk August RadkePart I Fundraising ................................................ 1–110Chapter 1 Brazil ................................................................................... 3Enrico Bentivegna, Jorge NF Lopes Jr andVitor Fernandes de AraujoChapter 2 Cayman Islands ............................................................ 14Nicholas Butcher and Iain McMurdoChapter 3 France ............................................................................... 23Stéphane Puel and Julien VandenbusscheChapter 4 Japan ................................................................................... 38Kei Ito, Taku Ishizu and Akihiro ShimodaChapter 5 Korea .................................................................................. 48Alex KM Yang, Young Man Huh, Hong Moo Junand Sae Uk KimChapter 6 Luxembourg ................................................................... 56Marc MeyersChapter 7 Netherlands ................................................................. 65Mark van DamChapter 8 United kingdom .......................................................... 75Mark MifsudChapter 9 United States ................................................................ 87John Ayer, Susan Eisenberg and Raj Marphatiaiii

ContentsPart II investing .................................................. 111–375Chapter 1 Belgium ........................................................................... 113Stefaan Deckmyn and Wim Vande VeldeChapter 2 Brazil ............................................................................... 126Álvaro Silas Uliani Martins dos Santosand Felipe Tavares BoechemChapter 3 Canada ............................................................................ 137Brian M Pukier and Sean VanderpolChapter 4 Chile ................................................................................. 147Andrés C Mena, Salvador Valdés and Francisco GuzmánChapter 5 China ................................................................................ 158Pierre-Luc Arsenault, Jesse Sheley and David Patrick EichChapter 6 Denmark ......................................................................... 177Hans Christian Pape, Lise Lotte Hjerrildand Christel Worre-JensenChapter 7 France ............................................................................. 187Olivier Diaz, Martin Lebeuf, Yann Grolleaud, Hugo Dienerand Bertrand de Saint QuentinChapter 8 Germany ......................................................................... 204Hans-Jörg Ziegenhain and Alexander G RangChapter 9 India ................................................................................. 215Vijay SambamurthiChapter 10 Ireland ........................................................................... 228David WidgerChapter 11 Italy .................................................................................. 242Fabio LabrunaChapter 12 Japan ................................................................................. 251Kei Ito, Taku Ishizu and Tomokazu Hayashiiv

ContentsChapter 13 Korea ................................................................................ 261Jong Koo Park, Hae Kyung Sung, Kyle Byoungwook Parkand Jaehee Lauren ChoiChapter 14 Netherlands ............................................................... 271Bas Vletter and Lucas CammelbeeckChapter 15 Portugal ....................................................................... 281Tomás Pessanha and Manuel Liberal JerónimoChapter 16 Singapore ...................................................................... 294Christy Lim, Quak Fi Ling and Dawn LawChapter 17 South Africa ................................................................ 306Mohamed Sajid Darsot and Tanya LokChapter 18 Spain .................................................................................. 321Christian Hoedl and Carlos DarocaChapter 19 Switzerland ................................................................ 332David Ledermann, Olivier Stahler and Nicolas BéguinChapter 20 United Arab Emirates ............................................. 342Amjad Ali Khan and Omar H AyadChapter 21 United Kingdom ........................................................ 347Stephen DrewittChapter 22 United States .............................................................. 362Norbert B Knapke IIAppendix 1 About the Authors ................................................. 376Appendix 2 Contributing Law Firms’ contact details ... 397v

Editor’s PrefaceThis inaugural edition of The Private Equity Review contains the views and observationsof leading private equity practitioners in 24 jurisdictions, spanning every region ofthe world. This worldwide survey reflects private equity’s emerging status as a globalindustry. Private equity is not limited to the United States and western Europe; rather, itis a significant part of the financial landscape both in developed countries and emergingmarkets alike. Today, there are more than a dozen private equity houses that have officesaround the world, with investment mandates matching such global capabilities. Inaddition to these global players, each region has numerous indigenous private equitysponsors.As these sponsors seek investment opportunities in every region of the world,they are turning to practitioners in each of these regions and asking two key commercialquestions: ‘how do I get my private equity deals done here?’, and the corollary question,‘how do I raise private equity money here?’ This review provides many of the answers tothese questions.Another recent global development that this review addresses is the differentregulatory schemes facing the private equity industry. Policymakers around the worldhave recognised the importance of private equity in today’s financial marketplace. Suchrecognition, however, has not led to a universal approach to regulating the industry;rather, policymakers have adopted many different schemes for the industry. The followingchapters help provide a description of these various regulatory regimes.I wish to thank all of the contributors for their support of this inaugural volumeof The Private Equity Review. I appreciate that they have taken time from their practicesto prepare these insightful and informative chapters.Kirk August RadkeKirkland & Ellis LLPNew YorkApril 2012vii

Chapter 17South AfricaMohamed Sajid Darsot and Tanya Lok 1IOVERVIEWThe recent global financial crisis and forecasts of a protracted financial winter settingin over the globe’s traditional economic superpowers has refocused attention on theemerging markets and the opportunities for growth that they present, in contrast withtheir more developed counterparts. Africa appears to have withstood the global financialcrisis and has emerged, in many respects, stronger than before. As the opportunitiesfor real growth become fewer and further between in many of the so-called developedeconomies, private equity funds have increasingly turned to Africa in their ongoing questto seek out the most attractive opportunities for sustainable investment returns.South Africa has long been the leading economic power in Africa. Largely due toits strong entrepreneurial culture, developed infrastructure, and sophisticated regulatoryand legal framework, it has seen its private equity industry demonstrate significantgrowth and resilience over the past few years. A major driver for this growth has been theincrease in investors’ appetite for exposure to positive, absolute returns and significantportfolio diversification benefits that investments in private equity funds in South Africaoffer. 2South Africa is also widely regarded as the ‘gateway’ or ‘springboard’ into theAfrican continent by firms who aspire to expand their reach and pursuit of new investmentopportunities in some of the world’s fastest-growing – and relatively untapped – emergingeconomies, those of sub-Saharan Africa. Both the World Bank and the International1 Mohamed Sajid Darsot is a director and Tanya Lok is an associate at ENS (Edward NathanSonnenbergs Inc.).2 KPMG and the South African Venture Capital and Private Equity Association (‘SAVCA’),‘Venture Capital and Private Equity Industry Performance Survey of South Africa covering the2008 calendar year’, May 2009.306

South AfricaMonetary Fund have estimated that sub-Saharan Africa will achieve some of the highestgrowth rates over the next five to 10 years.i Deal activityDuring 2011, private equity transactions in South Africa followed similar trends as inthe preceding few years, including investments in family-owned businesses, transactionscomprising large black economic empowerment (‘BEE’) components, and largecorporations and conglomerates unbundling their non-core assets.South African family-owned businesses account for approximately 65 per cent ofall business enterprises (slightly less than the global average of between 70 and 80 percent). Private equity groups have long seen family-owned businesses as one of the Africancontinent’s most popular sectors of economic activity, admired for being disciplined andwell run, and with generally lower levels of leverage and higher rates of return than mostother businesses. 3Private equity in South Africa is and will remain a significant role player in thedevelopment of BEE. According to J-P Fourie, the outgoing executive officer at SAVCA,the vast majority of transactions concluded by the private equity industry in South Africahave a significant BEE component and the majority of private equity fund managershave a BEE element to the structure of their funds. 4 BEE aims to statutorily redress theinequalities of South Africa’s past by giving previously disadvantaged groups economicopportunities previously unavailable to them.Secondary sales in the South African private equity market have also gainedmomentum in recent years.Five new control transactions were reportedly concluded in the South Africanprivate equity industry during the 2011 calendar year, 5 the most notable of which werethe Actis/Tracker deal and the Virgin Active/CVC Capital Partners deal (see Section III,infra).International investors seeking high-yield investments in emerging marketshave driven up the local South African listed market, making delisting a less attractiveoption for private equity funds, given the higher multiples being expected by sellers.Consequently there were fewer public to private transactions during 2011. One suchtransaction was the delisting of Universal Industries from the Johannesburg StockExchange (‘JSE’), by a consortium led by Ethos Private Equity (‘Ethos’).2011 saw approximately 12 new growth equity investments take place in the privateequity sector in South Africa, including Agri-Vie’s acquisitions of strategic equity stakes ineach of Hygrotech and HIK Abalone Farm (see Section III, infra).3 Michael Dynes, ‘Keeping it in the family’, 1 November 2010, www.africa-investor.com.4 J-P Fourie, ‘BEE and private equity powering on together’, August 2009, www.accountancysa.org.za.5 As at the date of publication, publicly available information (from SAVCA) was limited to yearsprior to the 2011 calendar year. In addition, the general trend in South Africa is that only thelarger private equity deals are publicly announced and the values of transactions are often notdisclosed, making obtaining reliable and verifiable statistics very challenging.307

InvestingAccording to the available statistics, three private equity exits took place byway of trade sale transactions during the course of 2011. A significant transaction inthe mobile banking industry was the acquisition by Visa, of HBD Venture Capital’sstake in Fundamo, a specialist mobile financial services provider to network operatorsand financial institutions in developing economies, for $28.2 million. This transactionformed part of Visa’s buyout of 100 per cent of the equity in Fundamo for an aggregateamount of $110 million. A further major trade sale transaction implemented during2011 was the China Investment Corporation’s (‘CIC’) acquisition of a 25 per cent stakein Shanduka Group (see Section III, infra).A major secondary sale that took place during 2011 was the Actom/Savciotransaction (see Section III, infra).The noteworthy initial public offering (‘IPO’) of 2011 was Holdsport, thesporting goods company that owns Sportsmans Warehouse, Outdoor Warehouse andFirst Ascent, which listed on the JSE on 18 July 2011. The listing was designed tofacilitate the exit of Ethos, Holdsport’s majority shareholder, which bought its majoritystake in Holdsport in 2006 through its Fund V for 681 million rand. Ethos raised 930million rand by way of a private placement with a broad base of institutional investors.The number of new investments reported for the 2010 year was 346, with anaggregate value of 5 billion rand. This number was down from 2009, which saw 468 newinvestments. However, the aggregate value of new investments in 2009 was less than in2010, at a value of 4.3 billion rand. The 2007 investment levels were an all-time high forthe South African private equity market, totalling 599 new investments, at an aggregatevalue of 24.7 billion rand. 6The total funds returned to investors increased from 2 billion rand in 2009 to17.3 billion rand in 2010. 7A total number of 83 disposals were reported during 2010 (at an aggregate valueof 4.689 billion rand) 8 . A total of 62 disposals were implemented in 2009, at an aggregatevalue of 836 million rand, and the number of disposals for 2007 was 135 disposals, at anaggregate value of 9.113 billion rand. The 2010 figures include:a nine trade sales, at an aggregate value of 947 million rand (2009: four, at anaggregate value of 67 million rand; 2007: two, at an aggregate value of 2.859billion rand);b eight secondary sales, at an aggregate value of 1.569 billion rand (2009: six, atan aggregate value of 442 million rand; 2007: 24, at an aggregate value of 4.029billion rand); and6 KPMG and SAVCA, ‘Venture Capital and Private Equity Industry Performance Survey ofSouth Africa covering the 2010 calendar year’, May 2011.7 Id. The 2010 aggregate figure includes an amount of 8.8 billion rand attributed to the Venfindisposal.8 Excluding the value of the Venfin disposal.308

South Africac12 IPOs and sales of listed shares, at an aggregate value of 1.511 billion rand(2009: five, at an aggregate value of 95 million rand; 2007: 11, at an aggregatevalue of 1.704 billion rand). 9Some of the leading private equity firms operating in South Africa include Old MutualPrivate Equity (‘OMPE’), Ethos, Horizon Equity, Actis, Sanlam Private Equity, Brait,Medu Capital, Basileus Capital, Helios Investment Partners and Capital Works.During 2011, the US-based private equity investor, Carlyle Group, launched a$750 million African-focused buyout and growth fund. It is understood that the fundwill be pursuing buyout and growth capital investment opportunities in companiesin sub-Saharan Africa, and will initially target the consumer goods, financial services,agriculture, infrastructure and energy sectors. 10South Africa’s E Oppenheimer & Son and Sennet Investments (Mauritius), anindirectly wholly owned subsidiary of Singapore state investor Temasek Holdings, haveformed a 50/50 joint-venture private equity fund, Tana Africa Capital. Tana Africa willprovide capital and business-building support to African businesses in two primarysectors: consumer goods and agriculture. The joint venture parties have indicated thatthey will also consider opportunities in media, health and education. 11The New Africa Mining Fund (‘NAMF’) launched its second Africa-focusedjunior venture capital fund (‘NAMF II’), with up to $110 million in commitmentsas at its first closing in January 2011. NAMF hopes to have total commitments of upto $300 million by NAMF II’s second closing, targeted for early 2012. Like its highlysuccessful predecessor NAMF I, NAMF II looks to provide risk capital for junior miningcompanies with projects in Africa that are able to demonstrate a minimum of a 35 percent return on investment.Lereko Metier Sustainable Capital Fund (‘LMSC’) closed during 2011, withthe South African Public Investment Corporation, the German Development FinanceInstitution DEG and the Dutch Development Bank being the main first closing investors.LMSC will target equity investments in the renewable energy, energy efficiency, waterand waste sectors in Southern Africa.Worth noting is the number of smaller private equity players emerging in theSouth African industry, specifically BEE funds focused on the secondary opportunitiesthat exist within the BEE arena (a number of BEE transactions (both listed and unlisted)present opportunities for secondary acquisitions). BEE parties with liquidity constraintsare selling out at reasonable discounts, while companies who have ‘BEE lock-ins’ that areabout to expire are seeking new BEE partners.There have been no notable private equity funds exiting the South Africanjurisdiction during 2011.9 KPMG and SAVCA, ‘Venture Capital and Private Equity Industry Performance Survey ofSouth Africa covering the 2010 calendar year’, May 2011.10 ‘Carlyle to launch Africa fund’, 10 March 2011, www.privateequityafrica.com.11 Janice Roberts, ‘New $300m private equity fund formed’, 8 August 2011, www.businessday.co.za.309

Investingii Operation of the marketThe market standard equity incentive arrangements in South Africa reflect theinternational 2/20 rule (i.e., a management company typically earns a management feeof 2 per cent of committed capital, and carried interest at a rate of 20 per cent). SouthAfrican private equity funds generally implement ‘hurdle rates’ of approximately 10 percent.The standard sale process in South Africa typically entails a merger or acquisition,structured in accordance with the parties’ individual requirements. Such transactionscan have varied time frames (anywhere from four weeks to 12 months, or longer),depending on the level of complexity necessitated by the parties’ commercial needsand regulatory approval required in terms of the preferred structure. Typically, a privateequity transaction may require:a exchange control approval from the South African Reserve Bank (‘the SARB’),which could take between four and eight weeks to finalise;b approval from the South African Competition Commission, which could take upto three months to obtain an intermediate merger approval, and between four andsix months to secure an approval for a large merger; andc if the transaction is structured by means of one of the restructuring provisionscontained in the South African Income Tax Act 1962 (‘the Tax Act’) (either Section45 or 47), the parties may require a directive from the South African RevenueServices (‘SARS’) regarding the deductibility of interest associated with the debtused to fund the restructure, as contemplated in the new Section 23K (see SectionIV, infra), a process that can take between six and eight weeks to finalise.IILEGAL FRAMEWORKi Acquisition of control and minority interestsThe common legal structures used by private equity funds to invest in South Africanportfolio companies are: private companies, partnerships (including en commanditepartnerships) or trusts.The partnership or joint venture structure is a relatively flexible and less regulatedstructure. It may, however, expose the partners to potential liability. The usual partnershipstructure used in the private equity industry is the en commandite partnership. An encommandite partnership comprises two classes of partners: disclosed partners (usually thegeneral partner) and undisclosed or commanditarian partners (the limited partners). Thepartnership business will be carried on in the name of the disclosed partners, who arefully liable to third parties for the debts of the partnership, while the commanditarianpartners undertake to contribute a fixed sum of money to the partnership business,conditional upon it receiving a fixed portion of the profits of the partnership business,if any are available for distribution. The names of the commanditarian partners maynot be disclosed to third parties. In the event that the partnership suffers a loss, thecommanditarian partners will not be liable to third parties, but will, however, be liableto the disclosed partners to the extent of the fixed capital that it contributed to thepartnership.310

Investinga related company, trade union representing the employees of the company, or any otherperson who has been granted leave by the court to do so, may serve a demand upon thecompany to commence or continue legal proceedings to protect the legal interests of thecompany and may apply to court for leave to bring or continue proceedings on behalfof the company if the company fails to do so. Furthermore, a shareholder is entitled toinstitute a personal action under common law to enforce its own rights for direct harmdone to it.The directors of a company owe fiduciary duties to the company of which theyare directors, and not to the specific shareholders of such company. However, directorsare obliged, in terms of the provisions of the Companies Act, to take cognisance of theinterests of all stakeholders in the company, subject to always acting in the best interestof the company.‘Director’ is defined very widely in the Companies Act, and includes any personoccupying the position of a director (by whatever name designated), such as executiveand non-executive directors, alternate directors, nominee directors, ex officio directors, 12de facto directors 13 and ‘shadow’ directors. 14The Companies Act sets out the standards of conduct expected from directors andpartially codifies the common law duties of directors, namely: the duty to act in the bestinterests and for the benefit of the company and not in the interests of any other person;the duty to avoid a conflict of interest; the duty not to exceed their powers; the dutynot to exercise their powers for an improper or collateral purpose; the duty to exercisean unfettered discretion; the duty to act in good faith and promote the best interests ofthe company; and the duty of skill, care and diligence. It is noteworthy, however, thatthe relevant provisions of the Companies Act specifically include references to alternatedirectors and also extend the duties and liabilities referred to in those provisions to12 An ex officio director means a person who holds office as a director of a company as a resultof holding some other office, title, designation or similar status specified in the company’smemorandum of incorporation (‘MOI’). The Companies Act states that ex officio directorshave all the duties, and are subject to all the potential liabilities, of any other director of thecompany, irrespective of the company’s MOI.13 The duties and liabilities of directors in terms of the Companies Act, as contemplated infootnote 12, are also likely to attach to a de facto director (and to a ‘shadow’ director – seefootnote 14), being a person who has been elected or appointed as a director, but in whoseelection or appointment some defect or irregularity exists, or a person who has not beenformally appointed to the board, or who was previously appointed and has ceased to holdoffice, but who nevertheless takes part in the management of the company and/or is held outas a director. Accordingly, senior managers of a company may be regarded as de facto directors.14 A ‘shadow director’ is considered to be a person who is not formally appointed as a director andwho does not directly participate in management, but in accordance with whose directions orinstructions (whether they extend over the whole or part of the activities of the company) thedirectors of the company are accustomed to act.312

South Africaprescribed officers, 15 board committee members and audit committee members (even ifthey are not members of the board).When a private equity fund appoints a nominee director to a portfolio company’sboard, there are certain important considerations to take into account. The primaryreason for appointing the nominee director would ordinarily be to protect the privateequity fund’s interests and its investment in the portfolio company; however, often theinstances where the private equity fund would look to protect its interests, are likely tobe the scenarios in which the nominee director could be conflicted and thus unable toparticipate in those board deliberations – thereby defeating the primary reason for his orher appointment. The nominee director would not be able to pass any information backto the private equity fund as a matter of law. If the portfolio company gets into financialdifficulty, the nominee director could, potentially, also become personally liable.Other considerations that private equity funds ought to take cognisance ofinclude competition (antitrust) legislation and regulations, environmental legislationand regulations, and anti-corruption legislation. Failure to comply with certain of thestatutory duties in respect of the foregoing may well lead to liability for the private equityfund.One of the principal legal considerations for a sponsor to exit an investment inSouth Africa would be the tax implications of such an exit, including capital gains taxor income tax considerations, dividends tax considerations and transfer taxes (includingsecurities transfer tax, transfer duty or value added tax in some instances). The SouthAfrican Exchange Control Regulations 1961 (‘the Excon Regulations’) will apply in theevent of the private equity fund (or any of its investors) being domiciled in a foreignjurisdiction (see Section IV, infra, regarding the applicability of the Excon Regulations).IIIYEAR IN REVIEWi Recent deal activityOne of the stand-out deals of the third quarter of 2011 was Actis’ acquisition ofone of the ‘big five’ vehicle tracking companies in the sub-Saharan region. Actis leda consortium in a $434 million 100 per cent management buyout of Tracker, SouthAfrica’s largest vehicle-tracking company. The transaction saw Remgro (one of SouthAfrica’s largest conglomerates) dispose of its 40 per cent interest in Tracker to Actis, whileFirstRand Bank restructured its investment to include Rand Merchant Bank, with theformer holding 10.14 per cent and the latter 12.54 per cent post implementation. Actisemployed a conservative strategy of 50 per cent debt to equity. 16Agri-Vie, a private equity fund focused on food and agri-business in sub-SaharanAfrica, acquired a 37 per cent stake in Hygrotech, a South African vegetable seed marketing15 A ‘prescribed officer’ would be a person that exercises, or regularly participates to a materialdegree in the exercise of, general executive control over and management of the whole, or asignificant portion, of the business and activities of the company, irrespective of any particulartitle given by the company to an office held by that person.16 ‘Tracker deal signals market recovery’, Catalyst, Volume 8 No. 3, September quarter 2011313

Investinggroup, for an undisclosed sum. Hygrotech has a presence in South Africa, Namibia,Mozambique, Zimbabwe, Zambia and Kenya. Agri-Vie’s second deal of 2011 concernedthe acquisition of a 37 per cent interest in HIK Abalone Farm, also for an undisclosed sum.Another agribusiness deal of 2011 was the acquisition by South African privateequity firm, Inspired Evolution, of a 25 per cent stake in the local abalone farm, Abagold,for approximately $7.6 million. The investment was jointly made with the IndustrialDevelopment Corporation of South Africa.Private equity firm Brait raised 6 billion rand through a rights issue during 2011in order to fund two major acquisitions – its largest funding project in decades. First,it acquired a 24.6 per cent stake in Pepkor (a South Africa-based investment holdingcompany with retail interests in Africa, Australia and Poland) for 4.18 billion rand. Braitalso acquired a 49.9 per cent stake in Premier Foods in a deal valued at approximately1.1 billion rand. 17CVC Capital Partners acquired a 51 per cent stake in Virgin Active (SouthAfrica’s largest health club chain), for an undisclosed sum. The partnership will supportVirgin Active’s growth in both existing and new regions. Virgin Active has a growingbase in a developing market in South Africa, with a strong growth trajectory. The brandis considered to be a class leader in its sector. 18ii FinancingPrivate equity deals in South Africa remain largely financed by a combination of bankdebt, in the form of senior loans, mezzanine debt and equity financing (including byway of preference share funding). The regulatory issues in respect of Sections 45 and 23Kof the Tax Act (see Section IV, infra) have forced companies to structure deals in a lessaggressive manner than in previous years. The majority of local transactions during 2011were financed by way of senior debt. 19The primary sources of finance utilised by private equity funds in South Africainclude policyholders, pension funds, insurance companies, commercial banks and highnet-worthindividuals.OMPE recently promoted private equity investment as a retail product to thegeneral South African consumer. This product may yet become a significant source offunding.The average debt-to-EBITDA (earnings before interest, taxes, depreciation andamortisation) ratios for leveraged buyouts was up from 4.2 in 2010 to 4.4 in 2011,signalling that the appetite of the banks or general partners for debt levels has improved.This is largely due to strong asset-backed or cash flow-generative businesses or banksgaining comfort on earnings streams and business prospects. 2017 Sure Kamhunga ‘Brait raises R6bn in markets for acquisitions’, 3 March 2011, www.businessday.co.za.18 ‘CVC flexes its guns’, Catalyst, Volume 8, No. 3, September quarter 2011.19 Source: Mohsin Cajee, OMPE.20 Source: Standard & Poor’s Rating Services and SCD.314

South AfricaHigh-yield bond issuers traded down in 2011, on the back of challengingmarket conditions largely caused by the debt crisis in Europe. High-yield bond marketsexperienced closures during 2010 and 2011, precipitated by peripheral sovereign issues. 21Financing remains available for credits in more stable sectors, less sensitive tomarket volatility and contagion effects. Debt-equity ratios in excess of 55 per cent areno longer considered favourable, unless they are heavily backed by asset cover. Capitalstructures for LBOs will be more conservative for the year ahead, with both pricing andterms expected to remain at similar levels to 2011. Senior debt pricing is expected toremain in the range of the Johannesburg interbank agreed rate (‘JIBAR’) + 3.5 per centto JIBAR + 7 per cent. Mezzanine debt is expected to become more expensive. 22Examples of key legal terms enforced in respect of financing private equity dealsinclude attractive yields being offered in relation to the credit risk profile of the relevantparties, a borrower not being able to retire its debt prior to the third anniversary of theissue of such debt, and a vanilla bullet repayment made at maturity.With regard to security required by lenders, they typically need real rights ofsecurity, including mortgage bonds over immoveable assets, special notarial bonds overidentified moveable assets, general notarial bond over all moveable assets, and pledges ofshares and shareholder loan accounts.iii Key terms of recent control transactionsForeign funds investing in South African entities are generally very aggressive regardingwarranties and warranty periods. Examples of typical warranties are ‘earn-outs’ and profitwarranties, ordinarily over a period of two years post-acquisition date.iv ExitsInternational private equity funds appear to be pursuing interests in growth assets,particularly in emerging markets. The significant exit of 2011 was undoubtedly CIC’sacquisition of a 25 per cent stake in Shanduka Group, a black-owned and managedinvestment holding company, in a deal valued at 2 billion rand. CIC primarily acquiredthe equity stake from exiting shareholders OMPE and Investec. 23Extraordinarily, Actis was at the forefront of a second multibillion-rand dealduring 2011. Private equity firms Actis and Ethos, with OMPE, as well as BEEshareholders, Sphere Holdings and Aka Capital, sold their stakes in Savcio to Actom, ina deal reportedly worth $500 million. Savcio is Africa’s largest privately owned electromechanicalprovider of maintenance and repair services for motors and transformers.Savcio was originally acquired from Delta Electrical Industries Limited in 2005, by aprivate equity consortium co-led by Ethos and Actis, with equity and considerable BEEfunding from Old Mutual. 2421 Source: Datastream.22 Source: Mohsin Cajee, OMPE.23 I-Net Bridge, ‘Old Mutual Private Equity sells Shanduka stake’, 22 December 2011, www.moneyweb.co.za.24 David Dolan, ‘S Africa approves Savcio sale to Actom’, 13 February 2012, www.reuters.com.315

InvestingIVREGULATORY DEVELOPMENTSThere is no particular regulatory body to which private equity firms must report in SouthAfrica; nor is there any one body that oversees private equity transactions. South Africa,however, has a number of legislative and regulatory frameworks (and institutions),of which private equity funds are required to be mindful. The major aspects of suchframeworks important to any player in the South African corporate landscape, are theBEE policies, the Takeover Regulations (overseen by the Takeover Regulation Panel),legislation regulating antitrust actions (overseen by the Competition Commission), theFinancial Service Board (‘the FSB’) (in certain circumstances), the Excon Regulations(overseen by the SARB), and in respect of any listed entities, the JSE Listing Requirements(overseen by the JSE).There have been some important regulatory and legislative developments in SouthAfrica over the past year, which indicate the South African government’s acknowledgmentof South Africa’s economic standing in Africa, and its responsibility to facilitate SouthAfrica’s role as the gateway jurisdiction for private equity funds into Africa.i TaxationThe Tax Act imposes taxes on South African residents on their worldwide income.A corporation will be a South African resident if it is incorporated in or ‘effectivelymanaged’ in South Africa, but excludes a corporation that is deemed exclusively residentin another country for the purposes of a tax treaty between South Africa and such othercountry. Non-residents are taxed on income that is derived from a South African source,as well as capital gains on the disposal of immoveable property and assets of a permanentestablishment in South Africa.Important tax allowances relevant to private equity funds are found in the corporaterestructuring provisions contained in the Tax Act, in terms of which restructures may beimplemented without triggering immediate tax obligations – such taxes are generallydeferred until a future disposal event.On 2 June 2011, the Treasury released the Draft Taxation Laws Amendment Bill2011, which proposed a moratorium on the use of Section 45 of the Tax Act (one ofthe cornerstone provisions relied upon for many restructuring, M&A and private equitytransactions), in respect of all disposals made on or after 1 June 2011. After extensivepublic consultation, the Treasury revised its proposal in respect of Section 45.Against this background, Section 23K was incorporated into the Tax Act on12 January 2012, and became retrospectively operative with respect to any amount ofinterest incurred in terms of any debt instrument issued or used for the purposes ofprocuring, facilitating or funding the acquisition of an asset in terms of Section 45 (asfrom 3 June 2011), or in terms of Section 47 (as from 3 August 2011), if such transactionswere entered into, on or after the respective dates. Interestingly, and contrary to theinitial proposals, Section 23K does not apply to Section 44 amalgamation transactionscontemplated in Section 44 of the Tax Act; however, Section 44(4) has been amended toprovide that an amalgamation transaction may not qualify for roll-over relief where theresultant company assumes a debt that was incurred by the amalgamated company forthe purpose of procuring, enabling, facilitating or funding the acquisition of assets bythe resultant company.316

Investingthe company itself. The proposed rate of dividend withholding tax (tabled in the Budget)is 15 per cent (increased from 10 per cent applicable to STC).Interest withholding taxes are to take effect in 2013 and will, broadly speaking,be applicable in respect of interest paid to non-residents where such interest is sourcedin South Africa, in accordance with certain deeming source rules. It is expected thatthe interest withholding tax rate will be 15 per cent. Certain exemptions will apply,including interest on listed debt instruments and interest on loans made to banks.ii Exchange Control RegulationsThe Exchange Control Regulations govern the movement of capital, whether directlyor indirectly, across the borders of South Africa. Such movements of capital need to beapproved by the SARB, generally through the commercial banks as its agents (referred toas ‘authorised dealers’), and subject to certain concessions in respect of members of theSouthern African Development Community.While South African exchange controls have effectively been abolished in relationto non-residents and the South African government is pursuing a policy of graduallyrelaxing the remaining exchange controls applicable to residents, South African residentsremain subject to exchange control measures. Non-resident investors, however, mayfreely invest in, or disinvest from, South Africa and may remit all income arising fromtheir South African investments offshore. Certain forms of investment by non-residents,however, are controlled by virtue of restrictions imposed on residents and resident entities;for example, the introduction of foreign loans and the payment of interest on such loansrequire the approval of the SARB. South African subsidiaries and branches of foreigncompanies are regarded as South African residents for exchange control purposes. Nonresidentshareholders must comply with certain formalities relating to the endorsementof the subsidiary’s share certificates to ensure that dividends and the proceeds on theeventual sale of the shares may be remitted to their offshore shareholders.The SARB announced during 2011 that headquarter companies will be treated,for exchange control purposes, as non-resident companies, other than for their reportingobligations. As a non-resident, a registered headquarter company may therefore raise anddeploy capital offshore without restriction. The headquarter company can freely borrowfrom abroad, and such borrowed funds may be deployed locally or offshore. Transactionsby South African entities with headquarter companies will be viewed as transactionswith non-residents and will be regarded as having been concluded outside South Africa.As a result of this announcement, there is no longer a need for qualifying headquartercompanies to obtain the SARB’s approval on a deal-by-deal basis for transactionsoutside the Common Monetary Area, which links South Africa, Namibia, Lesotho andSwaziland into a common monetary union. These qualifying companies now need onlyacquire upfront approval for foreign investment, and thereafter adhere to their reportingobligations as required by the SARB, including, inter alia, information regarding thesource of funds, new or existing funds, destination and loan funds from local sources.318

iiiCompany lawSouth AfricaThe new South African Companies Act came into operation on 1 May 2011. TheCompanies Act includes as its object, the encouragement of entrepreneurship andenterprise efficiency by simplifying the procedures for forming new companies andreducing the costs of forming and maintaining companies in South Africa; the promotionof innovation and investments in South African markets; and the encouragementof transparency and high standards of corporate governance and accountability. Anoteworthy revision to the existing position in respect of schemes of arrangement underthe Companies Act is that such schemes do not (except in certain circumstances) requirecourt approval, resulting in considerable time and cost-efficiencies.iv Pension fundsSouth Africa’s retirement industry is governed by the Pension Funds Act 1956 (‘thePFA’). In terms of the provisions of the PFA, the Minister of Finance has the power tomake regulations to limit the amount and extent to which pension funds may invest incertain asset classes. Regulation 28, promulgated in terms of the PFA, became effectiveon 1 July 2011. In terms of Regulation 28, pension funds can invest a total of 15 percent of their assets in hedge funds, private equity investments and any other investments.Funds may not, however, invest more than 10 per cent in hedge funds or private equity.The maximum allocation to a single private equity investment is further limited to 2.5per cent, with a 5 per cent maximum for fund of private equity funds. 25v Financial Advisory and Intermediary Services ActIn June 2011 the FSB published a draft Specific Code of Conduct for authorisedfinancial services providers and representatives conducting financial services businesswith professional clients (‘the Specific Code’). The FSB has recognised that certain typesof clients do not require the same level of protection as provided for in the FinancialAdvisory and Intermediary Services Act. The proposed Specific Code is more in line withthe internationally accepted principle that legislation should provide for different degreesof client protection, depending on the relative level of experience and expertise of clientsconcerned. Under the current draft of the Specific Code, a private equity fund mayqualify as a ‘professional client’. If the definition of ‘professional client’ contained in thecurrent draft is retained in the Specific Code, the consequence will be that investmentadvisers to private equity funds would only have to comply with the Specific Code inrespect of financial service rendered to the fund.Typical conditions imposed upon private equity funds or private equitytransactions include restraints of trade in relation to investments in industries similar tothose in which the disposing investee company has been operating. Such restraints aregenerally implemented for periods ranging from two to three years post acquisition date.25 Gareth Stokes, ‘The Nuts and Bolts of Regulation 28’, 13 April 2011, www.fanews.co.za.319

InvestingVOUTLOOKA number of key funds operating in the South African private equity market, suchas Brait, Ethos, OMPE and certain other funds have 2004–2005 vintages, and willconsequently find themselves in a position where exits are necessary in order to returncash to their investors. These funds will in turn be launching new funds – Ethos hasalready launched its Fund VI and OMPE plans to launch its new Old Mutual Multi-Manager Private Equity Fund 3 in the second quarter of 2012.It is expected that private equity funds will continue to focus on their existinginvestments, and extracting value from such investments. General partners are likelyto grow their portfolio assets through ‘bolt-on’ acquisitions or strategic value-addedopportunities.The outlook over the industrial sector in South Africa sees a continued internationaldemand for African resources via industrial firms. This is expected to drive demand forrail, port and logistics, renewable energy, water, waste and energy-efficiency spend.Upgrading of infrastructure will lead to new private equity firms focusing specifically onthese areas. The consumer sector outlook is positive and the consumer theme is expectedto continue for the ensuing year, with household demands remaining a positive driver ofgrowth. There are, however, unlikely to be larger private equity opportunities in the listedarena. The health-care sector is defensive with growing revenue streams and strong cashgeneration. Continued growth in the pharmaceutical industry, particularly for genericmedicines, can be expected.The global investment trend of seeking opportunities for sustainable returnsin emerging markets is likely to continue and be a key driver of inbound investmentinto the South African private equity market. South African sponsors are also expectedto forge ahead in their quest to claim their fair share of the ever-growing sub-Saharanmarket’s high-yielding investment prospects.320

Appendix 1About the AuthorsMohamed Sajid DarsotENS (Edward Nathan Sonnenbergs Inc.)Mohamed Sajid Darsot is a director at ENS and has over 11 years’ experience. Hepractises in the firm’s corporate commercial department, and specialises in mergers andacquisitions (including cross-border and BEE transactions), private equity, corporaterestructures and management buyouts.Mr Darsot has acted for clients (including listed, unlisted and multinational firms)in a variety of sectors, including hospitality and leisure, retail, automotive, transport andlogistics, technology, fuels and energy, health care and property development.Tanya LokENS (Edward Nathan Sonnenbergs Inc.)Tanya Lok is an associate at ENS and currently practises as an attorney in the corporatecommercial department. She specialises in mergers and acquisitions, commercialproperty transactions, corporate restructures and general corporate commercial work.Ms Lok has acted for clients in a range of different industries, such as thecommercial property, industrial, renewable energy and mining industries.376

About the AuthorsENS (Edward Nathan Sonnenbergs Inc.)150 West StreetSandton2196 JohannesburgSouth AfricaTel: +27 11 269 7600Fax: +27 11 269 78991 North Wharf SquareLoop StreetForeshore8001 Cape TownSouth AfricaTel: +27 21 410 2500Fax: +27 21 410 25551 Richefond CircleRidgeside Office ParkUmhlanga4320 DurbanSouth AfricaTel +27 31 301 9340Fax: +27 31 301 9343La Gratitude97 Dorp StreetStellenboschSouth AfricaTel: +27 21 808 6620Fax: +27 21 808 6633mdarsot@ens.co.zatlok@ens.co.zawww.ens.co.za377