A pri­vate eq­uity fund to cheer re­tail in­vestors

Finweek English Edition - - PRO PICK - BY CRAIG GRA­DIDGE Co-founder of Gra­didge-Mahura In­vest­ments

Ac ha l l enge f or g r owthori­en­tated re­tail in­vestors in South Africa is the lack of op­por­tu­ni­ties in the lo­cal mar­ket, with tra­di­tional as­set classes look­ing quite ex­pen­sive at the mo­ment. Lo­cal eq­ui­ties are ex­pen­sive rel­a­tive to other emerg­ing mar­ket eq­ui­ties and to the JSE’s own long-term his­tory. Listed prop­erty also looks ex­pen­sive from a yield per­spec­tive and the next move in in­ter­est rates is more likely to be up than down. This rea l l y l eaves growth in­vestors with just two op­por­tu­nity sets: off­shore or al­ter­na­tive.

In the al­ter­na­tive space, in­vestors can con­sider hedge funds and pri­vate eq­uity op­tions. As a busi­ness, we are not yet con­vinced of the mer­its of hedge funds as an as­set class. They re­main ex­pen­sive and they have not lived up to their value propo­si­tion of pro­tect­ing cap­i­tal in volatile mar­kets on a con­sis­tent enough ba­sis. There is also the pos­si­bil­ity of an event wip­ing out an en­tire fund, as was the case with Ever­est Cap­i­tal’s Global Fund fol­low­ing the un­ex­pected scrap­ping of t he Swiss f ranc’s cap against the euro in Jan­uary. We have, how­ever, been in­cor­po­rat­ing pri­vate eq­uity into client port­fo­lio for the past few years via Old Mu­tual Pri­vate Eq­uity (OMPE).

OMPE is one of the largest pri­vate eq­uity man­agers in SA, man­ag­ing over R10bn of pri­vate eq­uity as­sets on be­half of Old Mu­tual Life As­sur­ance Com­pany and third-party in­vestors.

The Old Mu­tual Pri­vate Eq­uity Multi Manager Fund 3 is the only pri­vate eq­uity fund avail­able to re­tail in­vestors in SA at the mo­ment. The main at­trac­tion of pri­vate eq­uity in a growth port­fo­lio is the low cor­re­la­tion of re­turns to other growth as­set classes, which is an im­por­tant fac­tor from a port­fo­lio risk mit­i­ga­tion per­spec­tive.

The Multi Manager Fund is in­vested i n f unds man­aged by es­tab­lished pri­vate eq­uit y play­ers such as Old Mu­tual Pri­vate Eq­uity, Ac­tis, Ethos, Cap­i­tal­works, and Car­lyle (in its Sub­Sa­ha­ran Africa Fund). Some of the com­pa­nies that the fund is in­vested in al­ready in­clude Con­sol Glass, Ac­tom, Recla­ma­tion and Tracker.

This is a high-risk fund that aims to ag­gres­sively out­per­form inf la­tion. Pri­vate eq­uity funds have the po­ten­tial to out­per­form tra­di­tional as­set classes

700

600

500

400 over the long term and to pro­vide di­ver­sif ica­tion for the so­phis­ti­cated in­vestor through their low cor­re­la­tion with other as­set classes. The key to this pri­vate eq­uity fund is the par­tially in­vested na­ture of the un­der­ly­ing funds and t he qualit y of t he un­der­ly­ing in­vestee com­pa­nies in th­ese funds. TAX AND LIQ­UID­ITY The in­vest­ment is housed in a l ifewrapped s t r uct ure (en­dow­ment), mean­ing that all taxes are in­curred within the fund and paid by the life com­pany. Tax is charged at a lower rate (30%) than if it was in­curred by a client earn­ing more than R701 300 per an­num. How­ever, the client has to give up ac­cess to th­ese funds for at least a f ive-year pe­riod. The lack of liq­uid­ity is one of the rea­sons we rec­om­mend a client in­vest up to a max­i­mum of 10% of their in­vest­ment port­fo­lio in such an in­vest­ment.

The Multi Manager Fund 3 port­fo­lio would be closing to re­tail in­vestors in June. The fund is near­ing the end of the R600m tranche made avail­able to re­tail in­vestors, but have also cho­sen to put a firm date to the cap­ping of the port­fo­lio.

The graph il­lus­trates the po­ten­tial pri­vate eq­uity holds. Launched in May 2006, Multi-Manager Pri­vate Eq­uity Fund 1 is Old Mu­tual’s f irst pri­vate eq­uity fund of funds and is close to ma­tur­ing. The fund has de­liv­ered an in­ter­nal rate of re­turn (IRR) of 27.1% per an­num since in­cep­tion, show­ing strong out­per­for­mance of both in­fla­tion and listed eq­uity. (The Multi Manager Fund 3 only has a track record of 21 months; Fund 1 is there­fore cho­sen for a more com­pre­hen­sive com­par­i­son.)

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