Abstract
Purpose: This study aims to scrutinise the South African economic framework
alongside the macroeconomic growth indicators, exploring their connection to private
equity penetration within the country. Despite South Africa's significant potential for
private equity investments, it has exhibited comparatively low private equity
penetration relative to other emerging economies. The research delves into prominent
macroeconomic elements such as market capitalisation, gross domestic product per
capita, inflation, exchange rates and banking credit, evaluating their impact on the
influx of private equity within the South African context.
Methodology: Employing time-series econometric techniques, this study examined
the relationship between private equity penetration and selected macroeconomic
growth indicators in South Africa. The Augmented Dickey-Fuller (ADF) test was first
applied to assess the stationarity properties of the variables. Given evidence of nonstationarity
and integration of order one, the Johansen cointegration technique was
employed to test for the existence of long-run equilibrium relationships among the
variables. A Vector Error Correction Model (VECM) was then estimated to capture
both the long-run dynamics and short-run adjustments. Finally, Granger causality tests
were conducted to determine the direction of causality between private equity
penetration and the macroeconomic variables.
Findings: The exploration into the macroeconomic drivers of private equity
penetration in South Africa identified that several key indicators, such as market
capitalisation, banking credit and gross domestic product per capita, demonstrated
non-stationarity at the initial level but achieved stationarity upon the second
differencing, thereby justifying the utilisation of the Vector Error Correction Model. The
application of the Johansen cointegration test revealed enduring relationships
between private equity and significant macroeconomic elements. It was observed that
market capitalisation has a favourable effect on private equity penetration, whereas
both banking credit and gross domestic product per capita exert adverse effects.
Granger causality evaluations suggested that market capitalisation acts as a Grangercause
for private equity, while inflation and gross domestic product per capita exhibit
bidirectional causality with private equity. The model showed robustness, as it did not
encounter any issues related to serial correlation or heteroskedasticity.