1. Parliamentary Standing Committee on Finance - Informal Hearings 22 June 2011 J-P Fourie and Mark Linington SAVCA www.savca.co.za

2. Presentation objectives  Overview of our industry in South Africa  Facts and figures of the industry and the economic impact thereof  Discuss the impacts of the suspension of Section 45

3. What is private equity?  Typically transformational and value-adding strategies.  Specialised skills and experience.  Reasons for private equity financing  increasing its working capital base;  business expansion and development;  developing new technologies and products in order to grow and/or remain competitive;  to finance acquisitions of other businesses;  to buy out certain shareholders in order to restructure the ownership and management of the business; and  introduction of BEE.

4. The global playing field…

5. Most activity is expansion/development-focused Source: SAVCA KPMG 2011 Private Equity Industry Performance Survey Analysis of investments by stage based on cost of investments

6. BEE investment activity Source: SAVCA KPMG 2011 Private Equity Industry Performance Survey Cost of BEE investments made during the year (excluding Captives – Government) (Rbn)

7. Third party funds raised are sourced from various geographies Source: SAVCA KPMG 2011 Private Equity Industry Performance Survey Geographic sources of third party funds raised

8.  Employment growth rates of 9% p.a. JSE business’s growth rates of 4% and 1% across all businesses in SA  Employment of 5% of SA’s formal sector employees which equates to around 427 000 jobs  Average turnover growth of 20%, compared to 18% for JSE businesses  Pre-tax profit growth of 16% per annum compared to 14% for JSE businesses  Average R&D expenditure growth of 7% compared to 1% for JSE listed businesses 2006 to 2009, Private Equity achieved: Source: SAVCA DBSA 2009 Private Equity Industry Economic Impact Survey

9. So what is the role/impact of role of Private Equity Source: SAVCA DBSA 2009 Private Equity Industry Economic Impact Survey  In the main, respondents report that private equity has made a positive contribution to their business

10. Impacts Private Equity  Respondents report that performance in key areas of business had improved since receiving PE or VC backing Source: SAVCA DBSA 2009 Private Equity Industry Economic Impact Survey

11. Reasons for Private Equity  Respondents were asked if they felt private equity was preferable to other forms of financing and why this was so Source: SAVCA DBSA 2009 Private Equity Industry Economic Impact Survey

12. Typical deal structure

13.  Make the acquisition more feasible for the investors;  Optimise debt security by direct access to assets and cash;  Debt advanced to a newly-formed company;  Uplift market values of assets; and  The legal structures can be simplified. Reasons for debt push-down

14. History of South African private equity Source: SAVCA KPMG 2011 Private Equity Industry Performance Survey Cost of investments made during the year (Rbn)

15.  Positive sentiment and growth forecasts;  World was flooded with liquidity and cheap debt;  Foreign bond markets were very active;  A handful of deals were funded by means of foreign bonds;  Local banks were lending on more generous terms;  A few debt packages were tranched (senior debt and mezzanine debt); and  Up to 70% third party debt. Landscape in 2006 – 2008

16.  No new foreign bond issues;  Mezzanine funding for the big deals has dried up;  Local banks have remained very cautious in providing the debt;  50% of local bank debt only in a deal; and  Interest rates are in the range of Jibar plus 2% to 4% therefore not excessive. Landscape post 2008

17. Typical capital structure

18.  In 2006-2008 some deals included mezzanine debt (10% - 15% of capital structure);  Not a feature of capital structures post;  Shareholder loans are the only subordinated debt; and  Exchange control limits the interest rate to prime. SARS toolkit  Shareholder loans are limited to a 3:1 ratio;  New thin capitalisation rules from October 2011; and  Withholding tax on interest from 2013. “Much of which carries a subordinated or junior ranking”

19.  Erodes confidence in South Africa;  Foreign investment will go elsewhere;  National Treasury and SARS have always been aware of debt push-down – SAVCA engagements in 2006/7;  Deals are being abandoned;  18 months will be a significant setback for the industry;  No consultation or warning; and  Need to restore certainty – SAVCA would like to urgently engage with National Treasury (as per 2007) Suspension of section 45