Private equity gains popularity

BILLION IN 2016. The standout theme of 2016 was the healthy flow of funds returned to investors, which increased by 123% year-on-year. JUMP 123% TO R18.3

Pension funds may slowly be warming up to investments in private equity, a new survey suggests. Although Regulation 28 of the Pension Funds Act was previously amended to allow pension funds to allocate up to 10% of their assets to private equity (from an earlier 2.5%), exposure has remained limited.

The lack of liquidity and knowledge of private equity seem to be the main reasons behind institutional investors’ reluctance to embrace the asset class. Private equity is a long-term, alternative asset class where fund managers raise third-party funds from various classes of investors to buy assets predominantly privately held.

Tanya van Lill, Southern African Venture Capital and Private Equity Association (Savca) CEO, says according to its 2017 Private Equity Industry Survey, R10.2 billion of third-party funds were raised last year, 73.5% within SA; 40% came from pension and endowment funds (2015: 35%.)

Van Lill says more pension funds realise and understand the value of private equity, but education efforts will continue.

While there’s been a year-onyear decrease in the amount of funds raised offshore, Van Lill says it’s too early to tell if it’s a trend or product of SA’s volatile political and economic situation.

The funds raised offshore in 2015 (base year for comparison) were mainly from one large fund manager.

Private equity funds have previously warned that the recent downgrade of SA’s sovereign credit rating could make it difficult for local funds to raise capital from international investors through traditional means in the short term.

In a departure from the previous trend – where most funds were raised for late-stage investments – R7 billion of the R10.2 billion were for early stage investments.

Van Lill says one of the fund managers – focused on early stage investment – did most of the fund raising in 2016 and it’s too early to tell whether it’s a trend.

The standout theme of 2016 was the healthy flow of funds returned to investors, which increased by 123% year-on-year to R18.3 billion, she says.

“This is as a result of a series of really good exits or disposals.

“While [overall] funds raised in 2016 were significantly lower than 2015, the substantial increase in capital returned to investors is indicative of the private equity life-cycle, showing that while certain periods focus on a fund raising mandate, other periods call for investment, and ultimately, the realisation of returns.” The average proceeds per exit was R176.3 million versus R48.1 million in 2015.

Funds under management in the Southern Africa private equity market increased from R158.5 billion in 2015 to R171.8 billion in 2016. Of this, R113.6 billion has already been invested, R24.6 billion is earmarked for SA investments and R33.6 billion for investments in other parts of the continent.

Since the survey launch in 1999, funds under management have shown 11.4% compound annual growth.

Private equity education efforts will continue