MEA | Q4 2024 he retail sector in South Africa has experienced significant distress in the last year, with several high-profile retail businesses entering business rescue proceedings. Retail giants like AutoZone, West Pack and Cross Trainer, for example, have all recently entered business rescue, highlighting the growing financial pressures faced by companies in the sector. Every challenge is also an opportunity and private equity firms are uniquely placed to step in and acquire distressed assets at attractive valuations, assisting to turn them around in the process. According to statistics by Trading Economics, consumer spending in South Africa amounted to R3.09bn in the first quarter of 2024, down slightly from R3.1bn in the fourth quarter of 2023. Factors such as high inflation and interest rates, increasing unemployment, global geopolitical challenges and resultant supply chain constraints have continued to dampen consumer confidence, leading to decreased sales and heightened financial stress for retailers. South African retail businesses such as AutoZone, the auto parts retailer, have struggled under heavy debt, demonstrating the vulnerability of niche markets within the sector. West Pack Lifestyle, despite being a popular household name, recently entered voluntary business rescue, indicating that even well-established brands are not immune to the current economic climate. Cross Trainer, an athletic and footwear retailer, has also faced financial distress, highlighting how shifts in consumer preferences and financial constraints are impacting even specialised retail sectors. Benefitting from high interest rates New numbers released in August 2024 by StatsSA, however, show a slight increase in consumer spending, with retail sales increasing by 4.1% year-on-year in June, up from the 1.1% increase recorded in May. And while global high interest rates have slowed growth around the world, PE funds have benefitted from the higher rates, with dry powder that was not deployed in challenging market conditions accumulating at record levels. A recent study by the South African Venture Capital and Private Equity Association also puts private equity fundraising in South Africa at a 13year high in 2023, with funds being raised in excess of R28bn, a 43% jump from 2022. With interest rates expected to decrease in the months ahead and consumer spending likely increasing as a result, PE firms are well placed to acquire, and have in many instances been specifically seeking out, investments in the retail sector. Distressed Retailers: Why Private Equity Funds Should Come to the Rescue in South Africa T The current economic conditions have also created opportunities for take-private transactions in the retail sector, particularly for listed companies with small-to-mid market capitalisations that are trading at discounts to their net asset values. In 2023, the JSE recorded 12 delistings, with 13 recorded in 2022. Many small to mid-cap listings on the JSE have also struggled with the administrative burden and significant costs relating to being listed, which the JSE is addressing via an ongoing simplification of its listing requirements. Certain companies have dealt with share prices that value them at a significant discount to their net asset value. In these scenarios, existing majority investors may be of the view that there is more value to be found by taking the company private. Kenya The same trend is evident in Kenya, where businesses in the retail sector are partnering with PE firms to enhance their business offerings, improve efficiency and grow into new markets. According to the Boston Consulting Group (BCG), PE investment funds can find opportunities to provide capital and management expertise that will enable local modern retail chains to scale up in new cities. In Kenya, PE funds are playing an important role in backing local, modern chains, such as Naivas and Quickmart, that target middleincome areas in major cities. In 2022, BCG noted in its Future of Traditional Retail in Africa report that investment funds were looking
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