The March 2019 edition of the RisCura – SAVCA South African Private Equity Performance Report shows that prospects for the local private equity industry are looking up, with the ten-, five-, and three-year ZAR internal rate of returns (IRRs) having improved from 13.2%, 12.2% and 7.0% in Q4 2018 to 14.5%, 12.8% and 8.2% in Q1 2019, respectively.
Despite being the second-largest African economy and the most industrialized African country, South Africa started off with a contraction in the economy by 3.2% in the first quarter of 2019, the largest quarterly decline in a decade. This came after recording a 1.4% growth in the fourth quarter of 2018. But that’s not all. In 2019, the country recorded its highest unemployment rate in eleven years. In addition, the country faced a growing fiscal deficit, heavily indebted SOEs and relatively low commodity prices.
Markedly, the South African private equity industry stands strong, its performance remaining favourable relative to the listed market. “Local private equity continues to outperform the South African listed equity market across all three listed benchmarks over the five- and three-year periods. Over the ten-year period, the only benchmark that private equity did not outperform is the FINDI TRI,” said Tanya van Lill, SAVCA CEO.
“This can be attributed to a longer-term investment horizon that private equity adopts with active management principles. That is, getting involved in the strategic and operational aspects of the businesses they invest in to realize value for investors.”
She added that these positive returns validate the industry’s resilience. She termed the performance ‘encouraging’ which underscores the returns-boosting role that this asset class can play in a diversified institutional portfolio.
The rise in sector-focused funds
According to Van Lill, an observation was made that more sector-specific funds came up, with various sectors appealing to existing private equity funds. There was more focus on particular deals and not particular sectors.
However, she notes that various deals were reported in the fast-moving consumer goods (FMCG), manufacturing and health care sectors in the first quarter.
“These sectors have always featured prominently in the private equity space as it gives investors access to sectors and geographies that aren’t necessarily available in the listed space. However, it is more deal-dependent and based on the attractiveness of the investment, rather than sector-specific. The majority of SAVCA’s members are of a ‘Generalist’ mandate and are therefore sector agnostic. ”
How can private equity funds protect themselves from a shaky economy?
Private equity is a long-term investment that is not susceptible to market fluctuations as other asset classes including listed equity. Private equity funds typically show a low correlation to equity markets and are relatively illiquid, especially at their onset.
Van Lill says that having a long term investment plan, a balanced portfolio based on industry and geography as well as adding real value to their investments, private equity funds can weather shaky economic conditions.
South Africa’s VC industry has not been left behind. It recorded noteworthy growth, with deals running up to roughly USD 97 Mn (ZAR 1.5 Bn) in 2018, according to a survey by SAVCA and Venture Solutions.
The 2010-incepted RisCura – SAVCA South African Private Equity Performance Report is a quarterly report that is a collaborative effort of Riscura, a professional investments service provider and Southern African Venture Capital and Private Equity Association (SAVCA), the representative body for private equity and venture capital in Southern Africa. The report tracks the performance of a representative group of the South African private equity funds.
Feature photo courtesy: Bower and Branch