Financial Mail - Investors Monthly
HAPPY RETURNS
Private equity allocations are rising, writes Pedro van Gaalen Within this space, private equity funds have looked to pockets of niche growth to drive returns
Private equity allocations are rising
Because of subdued equity performance in 2018, the persistent threat of a global recession and the uncertainty created by US trade wars and Brexit, investors are looking to asset classes that can deliver inflation-beating returns with lower volatility.
One asset class that has traditionally delivered robust yields is private equity. Bain & Company’s 2019 Global Private Equity Report supports this stance by highlighting the industry's success over the past five years.
According to the report, there was more money raised, invested and distributed back to investors during this period than at any other time. Every year since 2014 also produced successively higher deal values over the previous cycle, with the exception of the peak in 2006 and 2007.
Last year was particularly good for private equity investors. While competition and rising asset prices constrained deal count, reducing
individual transactions by 13% to 2,936 worldwide, the report says total buyout value jumped 10% to $582bn in 2018.
This market performance has helped to keep global private equity returns strong relative to other asset classes, despite slowly declining towards public market averages during the period.
Carlos Ferreira, co-CEO at Helical Capital Partners, confirms private equity has consistently outperformed the MSCI world index benchmark. “Some of this performance is driven by the longer-term views taken by private companies, which influences investment decisions. More companies are prepared to go private and stay private for longer.”
Ferreira supports this statement by highlighting the drop in the number of companies listed on US exchanges — the market is half the size of its mid-1990s peak, and 25% smaller than in 1976, according to a 2018 report by Ohio State finance professor René Stulz.
“This offers a broader universe of investment options in companies that predominantly have a management focus of long-term value creation, compared to the cyclical targets of publicly listed entities.”
And the case for making larger allocations to private equity investments remains strong, particularly as the macroeconomic and political factors affecting local and international markets look set to persist in 2019.
While this asset class is illiquid, with investment horizons of five to 10 years on average, the trade-off in liquidity to realise market-beating returns has increased private equity allocations as a proportion of balanced portfolios.
“International endowment funds allocate 20%-25% to private equity and venture capital within the range of alternative asset classes to decrease portfolio risk, but increase the potential of alpha returns,” adds Helical Capital Partners coCEO Craig Beney.
While prescribed regulation 28 limits restrict local pension and retirement funds in terms of their private equity allocations, Beney says many are pushing beyond the traditional and conservative 1%-2% allocation of their 10% limit, up to 7.5%, with a two to one split between local and offshore private equity exposure.
Heleen Goussard, RisCura's head of unlisted investment services, says the majority of local allocations go to growth funds. “The US style of private equity investing hasn’t taken hold locally. While investors have access to a few special opportunity funds and a growing universe of venture capital and small mezzanine funds, the focus remains predominantly on the midmarket and SMEs.”
Within this space, Goussard says private equity funds have looked to pockets of niche growth to drive returns given the poor macroeconomic growth in the country over the past five years.
And market expectations are that private equity returns will again outperform the market average this year, with 2019 already proving to be active.
Refinitiv’s Sub-Saharan Africa Investment Banking Review for Q1 2019 shows the value of announced merger and acquisition (M&A) transactions with any Sub-Saharan African involvement reached $8.8bn during the first quarter of 2019, up 41% from the same period last year.
Deals involving a sub-Saharan African target increased 71% to $6bn, driven by Naspers’s $5.1bn spin-off of its pay-TV unit MultiChoice. While inbound M&A involving an acquirer from outside the region was down 81% year on year, to a 16-year low of $540.1m, outbound M&A activity increased 24% to an eightyear high of $2.2bn. SA’s overseas acquisitions accounted for 57% of Sub-Saharan African outbound M&A activity.