Spoilt for choice
Investors in private equity can now choose from a range of industry sectors and geographies, writes Pedro van Gaalen
he private equity investment universe has grown in step with this asset class’s rise in prominence.
“Investors looking to create long-term value in private equity can now choose from a range of industry sectors and geographies, and across private asset classes such as unlisted property funds, alternative infrastructure funding, private debt funds, venture capital companies and section 12J and impact funds,” says Craig
Beney, CO-CEO at Helical Capital Partners.
Each company, sector and geography offers a unique value proposition and risk-return profile, which caters to the diverse requirements of investors, from institutional funds to family offices and high-net-worth retail investors.
“Broad exposure to different industry verticals and investments across geographies, along with consistent fund manager performance are the key considerations when selecting investments. Partnering fund managers in the top private equity performance quartile remains the most prudent approach,” says Beney.
Selecting the most appropriate private equity asset class will also deliver market-beating returns. The 2019 Knight Frank Wealth Report says private equity funds have generated attractive returns from
Tcommercial real estate in recent years, establishing a strong track record that has made it easier to raise further capital. It says 31% of all global commercial real estate transactions involve private capital.
Private equity funds long on cash and short on deals are also well positioned to pick up good deals and unlock value due to the number of distressed businesses, suggests Allen & Overy’s banking and finance partner Khurshid Fazel.
“The state of the economy means significant restructuring is happening as companies look to dispose of assets, often quickly. This creates opportunities for fund managers to pick up assets at a good price.”
Additional opportunities for local investors also exist in
specific industry sectors that are still experiencing robust growth, highlights Heleen Goussard, head of unlisted investment services at Riscura. “Tourism has performed well due to the weaker rand, more favourable visa regulations and a revision of birth certificate requirements when travelling with minors. Fintech is also busy, with numerous investments into companies developing passive ETF products and robo-adviser services, as is the renewable energy sector.”
With so many potential options, the ideal asset class and investment style would depend on the investor and their specific objectives.
“Pension funds are more conservative. They rely on more established strategies and have development investment policies that seek to create social and economic impact. They tend to invest thematically in businesses and sectors where they can quantify impact. Family offices are less risk averse and are more likely to invest in first-time innovative funds,” says Goussard.
There’s a variety of entry points into private equity. “A fund of funds is an attractive option for pension funds, as this offers instant diversification, whereas more sophisticated investors often prefer to deploy capital through a direct investment programme that seeks to construct a diverse range of vintage year investments over time.”
The private equity sector includes a growing secondary market. Though SA’S secondary market lags more developed markets like the US, local market activity is picking up.
While most funds would prefer to buy into primary deals because secondary market pricing comes at a premium to NAV, Fazel says limited deal flows restrict opportunities, particularly for new funds.
“Secondary market activity is increasing as funds buy and sell to each other. Certain riskaverse investors also prefer to play in this market as it offers greater visibility and less risk. Pension funds might be willing to pay a premium for disciplined businesses with good governance, particularly in a more volatile market.”
This broader spectrum of opportunities ensures investors gain access to private equity deals at different stages of the investment life cycle, says Helical Capital Partners CO-CEO Carlos Ferreira. “Investors can select to be in venture or seed capital, growth stage, buy-out or turnaround ventures to align with their mandate or riskreturn profile.”