Private equity funds offer attractive long-term returns

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The March 2015 RisCura-SAVCA South African Private Equity Performance Report shows that this asset class outperformed the JSE's All Share Total Return Index, which delivered 18.1%, as well as the Shareholder Weighted Total Return Index, which delivered 19.1%. The Financial and Industrial Index marginally outperformed private equity, at 21.6%.

The March 2015 annualised ten-year return of 20.5% is up from the December 2014 ten-year return of 19.1%, which in turn is an improvement on the September 2014 ten-year return of 18.5%.

"Private equity continues to deliver firm returns and remains an attractive asset class for pension funds and other institutional investors," says Erika van der Merwe, CEO of the Southern African Venture Capital and Private Equity Association (SAVCA). "It compares favourably to listed equity markets, which is particularly encouraging at this time, given the strong run enjoyed by the JSE's All Share Index in recent years."

Five-year period

The survey, which tracks the performance of a representative basket of local private equity funds, also shows that over a five-year period to March 2015, the annual performance of South African private equity was 17.0%, above the All Share of 16.1%. Over a three-year time period, private equity delivered a 15.0% annual return, with the All Share showing 19.4%.

Van der Merwe says that shorter return periods should be viewed with caution and that longer-term returns are the most indicative of private equity performance. This is because of the locked-in nature of fund structures, with fund life typically extending over ten years, as well as the typical investment cycle of private equity, which takes some time to realise returns.

Rory Ord, principal at RisCura, comments on how private equity funds are delivering this consistent performance. "We see good returns in terms of the unrealised valuations of underlying investments, as well as in rewarding realisations and exits from portfolio companies."

Realisation market

In 2014 the realisation market in the South African private equity industry returned the highest amount of capital since 2011. The 2015 KPMG-SAVCA Venture Capital and Private Equity Industry Performance Survey shows that funds returned to investors increased by R4.4bn (44.7%) to R14.2bn during 2014, from R9.8bn during 2013; and the value of disposals increased from R4.8bn in 2013 to R9.3bn during 2014. "We anticipate that this exit activity will pick up over the course of 2015, as part of the life cycle of private equity and in a context of attractive market valuations," says Van der Merwe.

Last year was also a solid year for the deployment of funds, with private equity investments made during 2014 totalling R17.4bn. The majority of these investments were for new as opposed to follow-on investments; and the average deal size for new investments increased to R153m, from R64m in 2013.

"This signals a strong return to the acquisition market by some of the larger private equity funds, and we expect deal-making and the investment of newly raised capital to continue increasing in 2015," says Van der Merwe.

The full report can be viewed at www.riscura.com