Global investors ratchet up their allocations to private equity

Erika van der Merwe, CEO of SAVCA

A recent NEPC survey, conducted by one of the largest US investment consulting firms to endowments and foundations, revealed that almost half of endowments and foundations plan to increase their private equity exposure.

“According to this survey, 43% of respondents are increasing their allocation to private equity, with 53% maintaining current exposure levels. Only 4% of respondents said they were planning on decreasing their exposure”, says Erika van der Merwe, CEO of the Southern African Venture Capital and Private Equity Association (SAVCA).

Investor satisfaction

This confident view on private equity is echoed in the findings of the most recent Preqin Quarterly Update (Q3, 2016), which brings together the results of a series of in-depth interviews of over 490 institutional investors in alternative assets from across the globe, including over 100 that are currently active in private equity.

Through these investor interviews, it was found that institutional investor satisfaction was highest for private equity, with 71% of active private equity investors reporting a positive perception of the asset class. Furthermore, over half (56%) of the institutional investors plan to increase their allocation to private equity in the long term.

In line with these findings, Coller Capital’s Global Private Equity Barometer: Winter 2016/2017 – which bi-annually surveys institutional investors in private equity on their plans and opinions – found that investors are optimistic about the medium-term outlook for their private equity portfolios, with around 77% forecasting net annual returns of over 11%, and around a fifth forecasting net annual returns of over 16%.

Local allocation slow

Locally, the allocation to private equity by institutional investors has been slower than has been the case in more developed markets, says Van der Merwe. The SAVCA 2016 New Frontiers report – which targeted the top 100 pension funds in South Africa and major pension funds in other SADC countries – showed that nearly two-thirds of respondents had neither a mandate nor a current allocation to private equity investments. “The two key reasons cited for pension fund managers not investing in private equity were an unfamiliarity with the asset class and a discomfort with its liquidity characteristics."

“The solid performance of private equity relative to other asset classes will, however, likely encourage local institutional investors over time to rethink the inclusion of this asset class as part of their portfolio.”

She refers to the latest RisCura-SAVCA South African Private Equity Performance Report (Q2 2016), stating that, despite slowed local and international economic growth, South African private equity continues to maintain firm returns, while outperforming the listed equity market.

<>Rate of return

As of 30 June 2016, the South African private equity industry delivered a ten-year internal rate of return (IRR) of 18.1%. This performance compares with the 12.6% delivered by the FTSE/JSE All Share Total Return Index (ALSI TRI) and 14.0% yielded by the FTSE/JSE Shareholder Weighted Total Return Index (SWIX TRI) over the same period, while the FTSE/JSE Financials (FINDI TRI) was in line, with an 18.0% return.

“Given the relative returns performance of private equity, combined with its notable impact characteristics – which include the environmental, social, governance and empowerment objectives achieved through the private equity partnership – many Southern African institutional investors are missing an opportunity by not including private equity as part of a disciplined, diversified portfolio construction approach,” Van der Merwe says.

“Our view is that, in time, there will be a more balanced appreciation amongst Southern African investors for the returns, risk mitigation and impact role that the asset class has,” concludes Van der Merwe.