South Africa is not backing its entrepreneurs, says the boss of sub-Saharan Africa's largest private equity fund, Stuart MacKenzie.

MacKenzie is the CEO of Ethos Private Equity, which is listing Ethos Capital on the JSE next month to raise money for the equity firm to invest in entrepreneurial businesses."South African entrepreneurs are among the best in the world and we don't back them enough, he says. "There is not enough of a funding ecosystem for them."South Africa has produced a disproportionate number of "global champions" over the years relative to the size of its economy, which he says is "directly a function of the quality of management teams and entrepreneurs that this country is capable of producing".But they are not being served well by the local investment community.story_article_left1"If you look at the allocations to alternative assets by the pension funds and institutions in South Africa, their allocations are less that 2%.In the developed world it is 20%. So there is a huge underallocation."MacKenzie blames this on a lack of familiarity with and understanding of how private equity firms such as Ethos do what they do, "and what a force for good we are".He says: "We would like this to change and would like initiatives like Ethos Capital to play a role in demystifying the sector and making investors more comfortable with what we do."What Ethos and other private equity firms do is buy businesses that are entrepreneurially managed and add institutional capital, governance and strategic direction to boost their growth."That is fuel for growth in any economy," says MacKenzie.Private equity firms can make eye-watering profits after buying companies - often built by the sweat and tears of entrepreneurs - by instituting ruthless cost-cutting measures which generally involve mass retrenchments, and then selling the companies five or seven years down the line.For some, they represent a particularly nasty side of capitalism. For MacKenzie, they are vital to development."We take entrepreneurially growing companies that have reached a certain stage in their evolution where they need help to scale to another level. That equity funding is crucial to building small to medium and large companies in South Africa's economy."The alternative financing space is one that needs far more focus than it is getting, he says."I think it is a critical part of financing growth in an economy, particularly an economy like ours."Private equity is a force for good that can do a lot of positives for the growth story. We are a very important ingredient in the financing ecosystem of any economy."The decision by Ethos to go the listing route to raise funds raises questions about just how tough the fundraising climate is at the moment.Very tough indeed if you're in a developing market, says MacKenzie.Fundraising goes through cycles and the current fundraising cycle in developed markets is very strong, with top quartile managers being oversubscribed.But in developing markets it is a lot harder given global macroeconomic factors such as the slowdown in China, the high degree of currency volatility and the low oil price.This has led to a reallocation of capital from developing to developed markets.In spite of a strong supportive base of investors in South Africa in its traditional funds, and the continued support of offshore investors that have supported the company over many years, Ethos is having to try a lot harder to raise funds."Bad macros have made it more difficult," says MacKenzie.But this is not why Ethos Capital is being listed."The genesis to Ethos Capital, which is a vehicle for permanent capital funding of our future strategy, was when we looked at our firm and investigated how we were going to continue to grow."It was decided that to enable Ethos Private Equity's strategy of growth and diversification, a permanent funding vehicle was needed that could "seed our future strategies so that we don't have a start-stop business model where you live with a degree of uncertainty about your future income streams, which creates a staccato kind of approach to strategy".block_quotes_start The consumer story will continue to be an exciting one for investors. Accessing it is all about discipline in execution block_quotes_endA public listing will provide Ethos Private Equity with funding security it otherwise doesn't have.In addition to its traditional sources of funding, "we want to be able to deliberately execute strategy consistently, and part of doing that is having a permanent capital vehicle".What about the downsides to listing?MacKenzie makes the point that the vehicle being listed is not the manager. It is a separate company that is an investor in the strategies of Ethos Private Equity."The manager will continue to do what it does without having to change our business model. We will continue to raise private equity funds, invest in a portfolio of private assets, actively manage those assets and then realise those assets over time."What about the pressure to achieve short-term goals?"Investors at Ethos Capital need to appreciate that this is a long-term value-creation model," he says.It takes three years to execute a strategy in a portfolio company, and another two or three to realise the value from that investment."Investors in Ethos Capital need to appreciate that that is the business model."Over the past 20 years of its 30-year life Ethos has achieved returns of 27%, but the question is whether it can sustain these returns in an environment of almost zero economic growth and increasing political and social instability."The macros always present their challenges, and we certainly don't have any tailwinds at the moment," he says.But it is important to appreciate what the model is."We invest in companies that we are able to impact."These range in size from R1-billion to R7-billion. And companies of that size always have an opportunity to grow."That's not rocket science. But it is hard to do."Even harder in a no-growth environment?"What we are relying on is self-help in these portfolio companies," he says.Take the two assets Ethos Private Equity bought from Nampak last year, a corrugated packaging business now called Neopak, and the tissue business Twinsaver.Ethos brought in "very senior executives with deep domain and sector expertise who have refreshed strategy and operations and company culture. Through that work we're seeing a real value unlock in these companies."Although packaging is seen as a low-growth sector, "we're seeing real outperformance in these businesses simply because we're focusing on them in a very deliberate way to execute strategy".Maybe, but the formula hasn't worked with parcel distribution company RTT, which Ethos bought in partnership with the Public Investment Corporation two years ago with the objective of launching it into African countries in accordance with its strategy to expand into Africa."That is a business that is really feeling the brunt of the low growth," he concedes."It is one of the companies that is really having to rethink its strategy to continue to grow in the current market."He denies that this indicates a flaw in the company's Africa expansion strategy."It's because logistics companies are heavily geared to growth in the economy."MacKenzie has previously been quite bullish about the firm's African expansion strategy - buying South African companies and launching them into the continent - but seems reluctant to admit how heavily dependent it is on projections of middle-class growth in Africa that now appear to be wildly optimistic."The consumer story will continue to be an exciting one for investors. Accessing it is all about discipline in execution."The companies Ethos has, which mostly provide corporate and industrial services, are not that exposed to the need for a bustling middle class. But that may well change."At the moment we don't necessarily have a huge consumer- facing portfolio, but in the long run I think it will be a trend that will drive our performance."Capturing the consumer market will be "all about execution", he says.What if it is not there?"It is important to appreciate that we're a South Africa-centric firm. No more than 30% of our strategies are sub-Saharan Africa."..