Edition: December 2015 / February 2016
Now a well-developed and sophisticated industry, Erika van der Merwe*
believes that private equity provides rewarding returns
for a range of investors and benefits for the broader economy.
The SA private-equity industry has
demonstrated impressive growth. Funds
under management have increased from
R39bn at end-2003 to R171bn at end-2014.
The typical third-party investors in private equity
include pension funds, endowments, development-finance
institutions, sovereign-wealth funds, life
offices, fund of funds and high net-worth individuals.
These investors see private equity as a vital element
in their investment mix, enabling them to diversify
an institutional portfolio while delivering superior
The range of privateequity
funds on offer to
should satisfy the
requirements of a broad
range of investment
There is growing and significant interest from the
public sector in this long-term alternative asset class.
For instance, the Government Employees Pension
Fund has become a major investor.
In SA, government private equity investment
assets have grown from a fledgling R5bn to R66bn
during the eleven years to 2014. The most recent
level of private-equity activity by government-owned
entities represents 39% of total SA private-equity
assets under management. Government is now matching allocations from the private independents.
One of the most prominent regulatory changes
in recent years is the amended Regulation 28 of the
Pension Funds Act. It allows SA pension funds to
invest up to 10% of contributions in private equity, an
increase from 2,5% prior to 2012. This change aligns
SA with practice in many developed markets where institutional investors are experienced allocators to private equity. In time, local pension funds will begin
to shift their investment focus accordingly.
The range of private-equity funds on offer to
institutional investors should satisfy the requirements
of a broad range of investment mandates. There
are fund managers with a generalist focus who
invest across the industry spectrum. And there are
fund managers with specialist focus who variously
concentrate, for instance, on infrastructure assets,
impact investing, smaller enterprises or specific
Private equity contrasts with traditional listede-quity
investing. It requires a unique investment
philosophy and tolerance. Investors in private equity
are committed for the long term, generally a 10-year
period. After the fundraising is complete, the private-equity
fund managers typically have five years in
which to deploy the funds through the purchase of
businesses for the private equity portfolio.
The serious work continues as private-equity
fund managers devote time and resources to hands-on
management of these underlying portfolio
companies. The objective is to create more vibrant,
sustainable and profitable businesses from which
capital returns can be generated.
Returns from SA private equity reflect consistent
success. The most recent RisCura-SAVCA Private
Equity Quarterly Performance Survey – which covers
activity up to the first quarter of 2015 – shows that
over a 10-year period the annualised internal rate of
return for SA private equity was 20,5% in comparison
to the return from the JSE All-Share Index of 18,1%.
While private equity undoubtedly is a profitable
asset class for investors, its influence goes beyond
the return metrics. Private equity is a force for good.
It has a far-reaching impact on broad variables such
as economic growth and employment. It fosters
sustainable growth and efficiencies in the underlying
Also, the SAVCA-DBSA Economic Impact Study
2014 – which surveyed private equity portfolio
companies – shows that the industry drives good
corporate governance. It further supports the
capital expenditure and expansion plans of portfolio companies, facilitates innovation, drives black
economic empowerment and leads to increased
employment during the private-equity partnership.
Now an established and dynamic industry
in SA, it has plenty of scope for growth. Foreign
institutional investors are increasingly looking to
SA private equity to boost their investment returns.
More than this, we’re seeing an expansion in
geographic investment mandates to include direct
investment into the rest of Africa as well as a trend
of encouraging portfolio companies to develop their
operations into the continent.
* Van der Merwe is chief executive of the Southern
Africa Venture Capital & Private Equity Association
(SAVCA), the industry body representing approx
R170bn in assets under management.