South African VC hots up amid influx of new managers

A flurry of VC activity drove spending up almost 40% last year as investors took advantage of tax-friendly government initiatives.

South African venture capital activity soared to record levels last year, according to research from the South African Venture Capital and Equity Association.

The country had 159 investments during the period, up from 114 in 2016, the industry body’s 2018 VC Industry Survey found. Spending jumped almost 38 percent year-on-year with 1.2 billion rand ($79.2 million; €67.7 million) invested.

“We’re seeing a lot of new fund managers that are coming to the industry,” Tanya van Lill, chief executive of SAVCA, told Private Equity International. “It is definitely far from mature. In private equity we’re much more mature in the PE growth, late-stage buyout phase, but in the VC phase in South Africa is still fairly new for us so I think we’re still going to see a lot more growth as new fund managers enter the market.”

SAVCA agrees with survey participants not to disclose any names or details of transactions, so it does not specify which managers are new to market.

Key activity drivers included 396 million rand in follow-on investments into existing portfolios, up from 291 million the previous year. Angel investors also increased their spending, deploying 73 million rand last year, compared with 44 million rand in 2016.

More money is flowing into early stage deals, with seed funding and start-up capital rising 8 percentage points to 57 percent of transactions. Only 42 percent of VC deals by value were categorised as growth capital last year, compared with 51 percent the previous year.

South African investors have been able to deduct expenditure generated by acquiring shares in venture capital companies from their income since 2009, provided those shares are held for less than five years.

“Government intervention and paying a lot of attention to entrepreneurship, which does increase employment, helps a lot,” van Lill said. “I do [also] think it’s the amount of entrepreneurs that we’re cultivating.”

Exit activity remained muted due to a dearth of investments in prior years. Last year had 15 exits, of which six were reported as a loss.

“The nature of VC is that you have to have a balanced portfolio and because VC is a much riskier asset class than others it’s about investing in the potential of the business,” van Lill added. “Sometimes that’s the difference.”