Calls mount to free up pension investments

● The ANC has an unlikely ally in its call for pension fund legislation to be amended to allow more of SA’s savings to go into financing infrastructure projects – the private equity industry.

But though the idea may be the same, the changes the industry has in mind are somewhat different to those envisaged by the ANC, which wants to see pension fund members’ money re-routed through development finance institutions such as the Development Bank of SA.

Instead, the industry wants simply to have the limits lifted on how much of their assets pension funds can invest in private equity funds, including those that invest in infrastructure projects. And it argues that investing in private equity can do a lot more to support companies and sustain jobs through the Covid crisis than investing in listed equities.

Regulation 28 of the Pension Funds Act governs how pension funds may allocate their assets between shares, bonds, cash and “alternative investments”, as well as between domestic and foreign investments.

It currently puts “alternatives” such as private equity, infrastructure and hedge funds in the same bucket and caps them at 15% of a pension fund’s assets, with a maximum of 10% for private equity on its own.

But the Southern African Venture Capital and Private Equity Industry Association (Savca) wants to see this changed to allow pension funds to gradually invest up to 15% of their assets in private equity.

Savca set out its proposals in a position paper which, coincidentally, came out this week, just as news of the ANC’s proposals emerged.

Savca CEO Tanya van Lill said in an interview that the industry — which has R175bn in funds under management — has been engaging with its regulators on amending regulation 28 for a long time.

“We don’t think these are fundamental changes. They can open up capital to be invested in private equity — and this will benefit the South African economy now more than ever, with private equity investors well placed to support the economic recovery.”

Van Lill said private equity funders in SA have been providing guidance and support to the companies in which they are invested during the lockdown, helping them to negotiate with lenders and to pivot their strategies to survive the crisis.

For pension funds, investments in private equity provide good returns and enable them to diversify their risk by investing in real assets, with real businesses that employ people, Van Lill said.

Private equity funders also invest in a much wider range of sectors than the JSE’s listed equity market, where the top 10 stocks of the JSE top 40 index account for almost 80% of the market capitalisation, according to the Savca position paper.

“Private equity invests broadly across the economy compared to the listed environment, particularly in high-growth, entrepreneurial businesses in sectors such as fintech and e-commerce, and assets that do not suit the listed environment, such as infrastructure and energy,” says the paper.

Van Lill said a large number of private equity fund managers specialise in infrastructure, with the industry having provided a substantial proportion of the funding for the renewable energy projects developed in recent years.

Figures for 2018 show more than 14% of the private equity industry’s investments were in the energy sector, with a further 17% in services and 17% in retail.

Globally, private equity has outperformed listed equity every year since at least 1988, while in SA it has earned comparable or better returns than listed equities.

Van Lill said there are already 10-20 pension funds that have reached their regulation 28 limits on private equity and have seen the value. Others need time to become comfortable with the asset class and develop the skills to invest in it, which is why Savca proposes that the limit should be raised to 15% only gradually.

The Financial Sector Conduct Authority (which regulates SA’s savings industry) confirmed this week that

Savca has shared its proposals — though any amendments to regulation 28 would require a policy decision, which would have to be considered by the National Treasury.