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| GROUP CHIEF EXECUTIVE'S REPORT |
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| Review of performance |
| 2006 saw Brait build on the sound business platform and strong
results of the prior year, producing a set of financial results which have
exceeded the performance of 2005. All business units have contributed
positively to the bottom-line and the prospects are for continued value
to be derived from Brait's current portfolio of businesses and
investments, and for a growing and more diversified earnings stream
in the short to medium-term. |
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| Review of operations |
| Private Equity |
Private Equity earnings were marginally up on the prior year's strong
results, with profit from operations increasing by 1%, to
US$39,1 million, producing a return on equity of 40,8% on average
capital employed of US$95,8 million. This performance was primarily
driven by value recognition in investments in Brait III and growth in
value of the group's proprietary investments, against a background of
a strongly performing economy and capital markets in South Africa,
during the period.
A number of realisations from Brait II investments were achieved
during the year, which included Shoe City, Prime Cure and Unispan,
leaving Brait II with one remaining investment prior to being closed
and fully wound up.
The portfolio companies in Brait III, primarily Net 1, Pepkor, Logical
Options and Wilderness, all performed very well operationally during
the course of the year. Brait Private Equity management and team
believe that there is still considerable value to be produced from the
investments in Brait III. Notable transactions in Brait III, during the
year, were: |
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The listing of Net 1 on Nasdaq which unlocked considerable value
for shareowners through the rebenchmarking of the Net 1 share to
approximately eight times its prelisting value and in which Brait
sold 20% of its holding. |
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Leveraged recapitalisation of the Reclamation Group, through an
MBO facilitated by the raising of debt in the Eurobond market,
which resulted in Brait III's realisation of five times its original
investment in Reclamation. |
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Fundraising for Brait IV continues to exhibit positive momentum, with
an increased level of interest being shown in both South Africa and
private equity, by both new investors and investors in existing Brait
funds. The first close of Brait IV, in the first quarter of 2006, gives us
great confidence that we are on track to achieve the target of
US$500 million (ZAR3,1 billion) for Brait IV which would, to date, make
it the largest of the Brait funds and the largest fund raised from third
parties for private equity in South Africa.
During 2005/2006, private equity grabbed international headlines with
nearly US$500 billion of private equity backed M+A deals concluded
globally in 2005, and about 33% of all M+A deals in Europe
generated through private equity. In South Africa, the South African
Venture Capital and Private Equity Association's (SAVCA) estimate of
private equity driven M+A activity was approximately ZAR5 billion
(2%) for 2005. If South African capital and investment markets follow
the international trends, it would indicate significant potential for the
growth of private equity linked transactions in the immediate future.
At Brait we believe that the future prospects for private equity business
in South Africa give rise to considerable optimism. The current macroeconomic
environment is the most supportive that it has been for
private equity business, in Brait's 15-year history. Factors supporting
this include low inflation, a low interest rate environment, strong and
upwardly trending economic growth, the availability of debt finance
structures and amounts that are new for this market, and the
transformation of the economy through BEE, which acts as a catalyst
for M+A activity.We believe that Brait is extraordinarily well positioned
to take advantage of this platform, given its existing well performing
portfolio of assets with considerable residual value, a new fund in Brait
IV providing the capital for future investments, and a healthy pipeline
of innovative and market significant transactions which are, in many
cases, in an advanced stage of development. In addition to this, Brait
has an experienced, cohesive team, capable of delivering on the
opportunities presented and we are confident that Brait Private Equity
will continue to grow assets and earnings and exceed its ROE targets. |
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| Corporate Finance |
The relatively strong improvement in corporate finance earnings, albeit
a minor contribution in absolute terms, is primarily due to fees earned
by the Specialised Debt unit. Fees were generated via Brait's role as
advisor and lead arranger in transactions that were innovative and
ground-breaking for the South African debt markets, in particular the
Foodcorp and Reclamation transactions. Central to both of these
transactions was the raising of debt in amounts and structure relative
to equity, on a scale never previously witnessed in South Africa. Both
transactions enabled the respective companies to restructure their
capital base, thereby reducing their weighted average cost of capital.
They made use of the High Yield bond market in Europe to raise a
significant portion of the debt, and are among the first South African
companies to do so. Within the Specialised Debt unit, Brait has a highly
talented team with a track record of closing innovative transactions
that have consistently reshaped the parameters of debt transactions in
South Africa. Our intention, going forward, is to build on this platform,
and to broaden the capacity and expertise of the team members into
other debt products and services.
Despite the existence of a promising mid-year pipeline of mandated
deals and work in progress, the M+A/advisory business continued to
struggle to conclude transactions and generate fees, resulting in a
US$2,1 million operational loss for the year from this unit within the
Corporate Finance segment. Consequently Brait has decided, post year-end,
to restructure this unit to primarily provide internal advisory and
investment support for other Brait business segments. |
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