Private equity and venture capital transactions in South Africa move through a predictable sequence: investment thesis, preliminary commercial assessment, indicative terms, and then due diligence. It is in due diligence that deals most often stall, reprice, or collapse – and the findings that cause this are, with notable regularity, things that were knowable before the process started.
For fund managers, this creates a structural problem. The cost of a failed or restructured deal is not just the direct fees. It is IC time, deal team bandwidth, LP relationships affected by missed deployment targets, and the opportunity cost of months spent on a transaction that did not close.
Here is what we see most often – and how deal structures can be designed to absorb or mitigate these risks.
Ownership that does not survive scrutiny
Founder-led businesses – which represent a significant proportion of Southern African investment targets – frequently have shareholding structures that do not reflect what founders believe to be in place. This includes share issues that were resolved but never implemented, B-BBEE structures that have shifted in practice without legal adjustment, and option agreements or convertible instruments that create claims on equity that were not disclosed in the information memorandum.
From an investor’s perspective, this is not just a valuation problem. It affects the integrity of the investment structure being built above the target, the cap table that LPs will see, and the exit mechanics the fund is planning. Clean ownership documentation should be a pre-condition for proceeding to exclusivity.
Employment risk that becomes the investor’s problem post-close
South African employment law creates substantial residual risk for incoming shareholders. CCMA matters that are live at signing do not disappear on close – they become the liability of whoever holds the shares. Contractor arrangements that were commercially convenient for the target may be re-characterised as employment relationships, with retrospective consequences that a warranty from a founder may not adequately cover.
The structural response is not to price employment risk into the acquisition discount and move on. It is to conduct a targeted employment audit during due diligence, require specific representations and warranties with appropriate retention or escrow mechanisms, and – where the risk is material – to structure close conditions around resolution of identified matters.
IP sitting in the wrong place
The asset base the investor believes they are acquiring often includes intellectual property that does not legally sit in the entity being purchased. Proprietary systems built by contractors under informal arrangements. Domain names and brand registrations in the founder’s personal name. Software built on open-source components with licence conditions that affect commercialisation.
This matters differently to an investor than it does to a trade buyer. A strategic acquirer may have the capacity to absorb and restructure IP ownership post-close. A fund acquiring a minority or majority stake is left holding an investment in a business where the core value may not be protected. IP assignment and regularisation should be a closing deliverable, not a post-investment action.
Governance that will not hold under LP scrutiny
The governance transition that happens between signing and close – and in the first 90 days post-close – is where many investments begin to underperform their thesis. Board composition that does not reflect the new power structure. Information rights that exist in the SHA but are resisted in practice by founder management. Reporting frameworks that were agreed in principle but have no operational infrastructure behind them.
Investor-led due diligence should include specific assessment of governance readiness: does the existing management team have the capability and the willingness to operate within the information and accountability disciplines that institutional investment requires? Founder resistance to post-investment reporting is a named and well-documented risk in emerging market transactions. It should be addressed in the investment agreement, not discovered after deployment.
Financial close assumptions that the deal structure cannot support
For transactions that require third-party financing – whether debt alongside equity, or DFI co-investment – the legal structure needs to be designed from the outset to accommodate the requirements of each capital provider. Security arrangements, subordination agreements, step-in rights, and reporting covenants that work for one lender but conflict with another are a common source of delay at close.
The fund managers who close fastest are those whose legal team is involved in deal structuring before the term sheet is finalised – not brought in to execute once commercial terms are agreed. Legal structure is a commercial variable, not an administrative function.
Caveat Legal works with private equity and venture capital fund managers on investment transactions across Southern Africa, from due diligence through to post-investment governance and exit. If you are in a live transaction and want a second opinion on deal structure or legal risk, we are available to engage quickly and on clearly defined terms.
