Private equity: Fund for firms in trouble

A new type of private equity fund for SA with a focus on injecting money into distressed businesses to put them back on their feet was introduced by Africa Special Opportunities Capital (Asoc) this year. The team behind it has experience in business rescue, corporate finance and restructuring.

Asoc Fund I, which has raised R150m mainly from Conduit Capital, MMI Group and its founding partners, closed in August and expects to complete its first transaction early next year. It is also looking at a second transaction.

Asoc CEO Richard Ferguson has experience in business restructuring; chief investment officer Shaun Collyer worked for private equity funds in the US that invest in businesses undergoing Chapter 11 proceedings (a type of business rescue); and Paul Birkett has a background in corporate finance, mergers and acquisitions.

Collyer says the SA economy may not be technically in recession but leading indicators show an increased number of businesses are experiencing financial stress.

Business rescue is a voluntary step that may ward off forced liquidation. It gives a company temporary relief from immediate contractual obligations to restructure under the management of an external manager called a business rescue practitioner. Collyer says the process is similar to the Chapter 11 process in the US, and in the five years since business rescue was introduced it has matured, though it still tends to favour creditors more than Chapter 11 does.

SA banks are considerably more supportive of businesses in distress than their US counterparts, and local entrepreneurs take their obligation to repay debt more seriously, Collyer says. But this may be because there is a lot more liquidity for distressed companies in the US.

Asoc Fund I will invest between R30m and R50m in a company that is fundamentally sound but may have hit a financial crisis, for example the loss of a major customer.

Ideally, Collyer says, the fund managers prefer to be involved in finding a solution before a company opts for business rescue, but it is also prepared to provide post-commencement finance with the agreement of the business rescue practitioners.

The fund will extend collateralised debt, which it could convert into equity after a company emerges from business rescue.

Collyer says Asoc’s mandate is to rescue and restructure businesses and save jobs, not strip assets. The cost of Asoc’s funding will vary depending on the risk and the security available in each situation, but in all cases will be structured to support the business and avoid another crisis.

Certain sectors are ruled out: primary mining, agriculture and real estate development. The fund is targeting medium-sized businesses with a turnover of between R75m and R150m, with no profit minimum. “We are not afraid of red ink,” Collyer says.

The fund managers’ involvement depends on securing the co-operation of creditors, so they work together with the fund managers and business rescue practitioner, if there is one, to save the company over six months or even a year.

Asoc Fund I has a four-year window, with an option of extension for another year. It is a pilot fund to test the concept in SA and, if successful, will be followed by others.