Medu Capital's Nhlanganiso Mkwanazi is upbeat about South Africa's investment prospects

"We plan for the worst and hope for the best."

The year 2019 will be major milestone for boutique private equity firm Medu Capital.

Firstly, Medu Capital will be celebrating its 16th anniversary in January. Arguably, it’s a fitting testament to its resilience, having survived various political and economic cycles since its inception in 2003 including the aftershocks of the dot-com bubble and the 2007/8 global financial crisis.

Secondly, Medu Capital will be coming to market next year to raise its fourth private equity fund after successfully raising over R2 billion in capital over the past 15 years.

It has a long private equity track record. Medu Capital has operated three funds – MEDU I, MEDU II, and MEDU III. The first fund is fully invested and exited, the second is fully invested and on-going investments are still being made in the third. 

Its mandate is simple: investing capital of between R50 million and R250 million in South Africa-based medium-sized businesses with an annual turnover of between R200 million and R2 billion.

Unlike its private equity peers, Medu Capital is sector agnostic. And this is reflected in its diverse portfolio of investments that include, among others, Van Schaik Bookstores (retailer of educational materials), Universal Paints (manufacturer and supplier of paint), HeroTel (ICT firm) and Copper Tubing Africa (manufacturer and supplier of copper tubing).

Partnering with entrepreneurs and grow their businesses is at the heart Medu Capital’s philosophy. On a cursory view, Medu Capital is not just a passive provider of capital.

Medu Capital was co-founded by chartered accountants Nhlanganiso Mkwanazi (pictured) and Ernest January. Both met at Deloitte while completing their articles but went their separate ways when Nhlanganiso decided to carve out a career in a management consulting firm Gemini Consulting and Capital Partners (now known as Brait). Meanwhile, Ernest decided to stay at Deloitte but moved on to build a career in investment management working for Anglo American’s investment division and then RMB Asset Management. 

When Nhlanganiso and Ernest teamed up to launch Medu Capital, Brait acquired a minority stake in the start-up and helped establish its first fund, which successfully raised over R250 million.

Nhlanganiso spoke to M&A Africa about Medu Capital’s private equity model, approach to deals and the firm’s next growth chapter.

M&A Africa: What is Medu Capital’s philosophy?

Nhlanganiso: What gets us going is the quality of potential partners and attractiveness of underlying businesses. We tend to be bottom-up in our approach; we look at every opportunity with its own merit.  The underlying business or opportunity must be well established and not in turnaround mode, there must be prospects for growth and development. It must be owner managed.

We believe in the partnership role in businesses we invest in. The combination of our skills base and capital can play a significant role in ensuring that owner-managed medium-sized businesses can grow and reach their potential.

M&A Africa: Why specific approach on medium-sized business?

Nhlanganiso: There is a bigger opportunity set in the sector.  It is a sector that we understand and are comfortable in as we have been trading in the space for a number of years. We feel that it arguably has a better return opportunity. If you look at return outcomes around the world, mid-market returns are superior to large market companies.

Pricing is also more favourable than large enterprises. The scope of growth is higher in medium-sized businesses.   We can still wrap our arms around the businesses and understand what we are involved in.

M&A Africa: Do opportunities and deals come easy in the mid-market segment?

Nhlanganiso: Yes. But quality opportunities are few and far between. We think there is a limited amount of equity risk capital for unlisted companies. The capital markets system that we have is still focused on listed securities.

With the changes in Regulation 28 in the pension funds industry a few years ago[new regulations that make it possible to invest in alternative asset classes such as unlisted securities], investors are starting to think about strategic allocations into alternative investments. Considering that there is limited capital for unlisted equities, we are finding that there is a limited number of private equity players for the market. Consequently, we get to see a lot of opportunities come our way.

M&A Africa: Are quality deals hard to come by in a tough economic environment?

Nhlanganiso: Yes, and in a more constrained environment, we tend to be more selective when it comes to opportunities. In terms of the value of closed deals, we are nowhere near the peaks that we experienced in 2006/7.  It’s not like we are in a free fall. We have reached the trough and I would like to believe that the value of deals closed will continue to increase.

M&A Africa: How is Medu Capital navigating the tough economic and political market?

Nhlanganiso: We subscribe to the philosophy of a glass half full. Despite there being difficulties in the market, we ask ourselves several questions; where is the opportunity? how can we deploy capital smartly? how do we make our underlying businesses fitter and better to trade in this environment? how do we position ourselves better so when the uptick comes we are able to reap the rewards of our work?

There are risks in the market. That’s why in our investment strategy we must be measured and thoughtful. We plan for the worst and hope for the best. If you don’t believe in a brighter future as a core belief, then it is hard to invest.

M&A Africa: Are you looking at opportunities outside of South Africa?

Nhlanganiso: As an aspiration, we are interested in the rest of Africa. Our mandate does allow us to invest outside South Africa. But it’s easier said than done. We can’t manage investments in Nigeria, for example, based in South Africa. We have to be based on the ground in Nigeria. At this point, we have to play to our strengths.  I think there is a better risk-return outcome in South Africa, where we are closer to the deal flow, we have the networks, we understand the landscape and what we are dealing with. We would argue that the return on effort is still best in South Africa.

M&A Africa: Then are you ruling out expanding investments in sub-Saharan Africa?

Nhlanganiso: No. We believe that our future and organisation is better served in us having deeper knowledge capability and capacity to find opportunities outside South Africa in the longer term. It will open the opportunity set for us. It will also support our South African investments better in having the opportunity and knowledge outside South Africa. It will be important for the growth strategies of our portfolio businesses for them to introduce product lines in the rest of the continent.

M&A Africa: Which regions in the continent that are piquing your interest?

Nhlanganiso: We have researched the SADC (the Southern African Development Community that includes Botswana, Mozambique, Tanzania, Angola, Zambia, Malawi and more). It is easy to do business and understand this region. But when moving to East, Central and West Africa, this is further away from our environment. It would help the portfolio companies if we moved ahead in the SADAC region once we have established relationships and understand the landscape.


Medu Capital deals concluded  in 2017 and 2018: 15 percent in HeroTel, 75 percent in Mount Carmel Farms and 32 percent in VO Connect.