Ethos Private Equity made headlines this month with its announcement that it would be listing Ethos Capital Partners on the JSE. Interest in the listing of the permanent capital raising vehicle saw investors committing R1.1bn ahead of its IPO early next month. SAVCA speaks to Ethos Private Equity CEO Stuart MacKenzie (“SM”, pictured) about the move.
What motivated the decision to list Ethos Capital on the JSE main board?
SM: There were offensive and defensive reasons. From an offensive perspective, we have built an incredibly strong operational platform and in review our strategy, we realised that we have an opportunity to diversify our product offering to investors off this platform.
Launching new strategies like the Mid Market Fund and a Mezzanine Fund is much easier to do off an established operational platform and can offer the teams managing those strategies a competitive advantage.
As the industry has matured, it has become harder and harder for teams without an established platform to compete. We can offer teams such a platform and help them accelerate their strategies whilst providing new avenues of growth for our Firm. In addition, the listing of Ethos Capital opens up the Funds we manage to a larger pool of investors.
Over the years we have frequently been approached by institutions and high net worth individuals wanting to participate in our Funds, but who have been precluded from doing so because of the large and relatively illiquid nature of the commitments required. Ethos Capital removes these constraints.
From a defensive perspective, having a permanent capital vehicle that can act as an anchor investor in our underlying Fund strategies mitigates against the disruptive periods of uncertainty that exist between fund raising cycles.
Having a seed investor in our Funds will enable us to be far more deliberate about executing strategy in our Firm. This, in turn will ensure that we continue to maintain our differentiation by being able to continue to invest in the platform.
In the long run we hope that Ethos Capital will demystify the alternative investment space and help drive pension fund allocations to the asset class up. In developed markets, pension funds allocate up to 20% of their funds to the alternative asset class whereas in SA we are sitting at less than 2%.
We are passionate about the SME space and hold the view that Private Equity has a vital role to play in providing both capital and expertise to help grow SMEs and that this growth is in turn critical to achieving sustained growth in a developing economy.
Who is the target investor for this capital raising vehicle?
SM: To fund our expansion strategies, we needed an innovative, attractive solution. The Ethos Capital offer is mainly targeted at institutional investors and qualifying high net worth individuals (interested parties can apply through their brokers).
The listing will provide investors with a regulated, listed, liquid platform to invest alongside Ethos Private Equity into new underlying funds.
How will capital raised through Ethos Capital Partners be deployed?
SM: I would like to stress that our traditional long-horizon investment model remains unchanged. It is business as usual but we are leveraging our institutionalised platform, Ethos Private Equity, to launch new products into the market and attract specialised teams of talent.
Investors into Ethos Capital will participate alongside Ethos Private Equity’s traditional Limited Partner investors, investing into our traditional large buyout funds as well as a number of new offerings, including a mid-market product as well as mezzanine finance. Companies with an enterprise value of between R1 billion and R7 billion will fall into our investment sweet spot.
The mid-market space forms a large part of our historic track record and is a space we have migrated away from as our funds have got larger and larger. We see a significant number of opportunities in a year and we land up turning down a number of them because they are too small. Not because they are unattractive. The Mid Market Fund will now give us a home form them.
New initiatives are:
Mezzanine Finance is a product well known to Ethos. By bring on board a specialist team with a strong track record we will be able to offer mezzanine funding solutions alongside our traditional private equity funding solutions.
Ethos Mid Market Fund I recently launched and currently raising capital
Focus of the Mid Market Fund I will be on private equity investments in the mid-market space, co-investing as the B-BBEE partner alongside other Ethos Funds/benefitting from facilitated B-BBEE transactions with companies requiring a long-term B-BBEE partner that has capital to meet growth requirements.
Ethos Mezzanine Fund I, a closed-end mezzanine debt fund.
Ethos Fund VII intends to begin capital raising in second half of 2016
Target companies with value of R1.5 bn to R7 bn with investments of between R450 mn and R1 bn per opportunity
How will the Ethos Capital and Ethos Private Equity businesses complement one another?
SM: The simplest way to think of Ethos Capital is as a feeder fund for the funds managed by Ethos Private Equity. Ethos Capital will be governed by an independent board of directors and will have its own Investment Committee which will make recommendation to Ethos Capital’s Board with respect to commitments to the funds or investments managed by Ethos Private Equity.
This independence is critically important to protect investor in Ethos Capital. The Investment Committee of Ethos Capital will be headed up by Michael Pfaff and Derek Prout-Jones, two highly seasoned investment professionals who are well known to the market.
Ethos Private Equity’s business model is not changing and it will continue to manage funds on behalf of its traditional investors alongside Ethos Capital’s commitments. This innovative structure will open up the Funds managed by Ethos Capital to a new universe of investors, help seed new funds for Ethos Private Equity and over time expand the alternative asset class in South Africa and the rest of sub-Saharan Africa.