The recent increased volatility in the global market has influenced an uptick in changes to the way many financial sectors operate – and private equity is no exclusion. Amid global concerns about currency instability and sluggish economic growth, there appears to be a gradual, yet notable shift in the approach taken by both local and global private equity fund managers towards fund structuring.
This is according to Tanya van Lill, CEO of the Southern African Venture Capital and Private Equity Association (SAVCA), who recently attended the Global Private Equity Conference (GPEC) in association with the Emerging Markets Private Equity Association (EMPEA) in Washington DC, where a number of discussions pointed to this growing trend.
She explains that, while the traditional approach to private equity fund structuring involves managers raising third-party capital from large institutional investors – and structuring this capital into closed-ended funds governed by a partnership structure, with a typical life of 10 years – there is a shift toward managers adapting this model to incorporate new elements. “Although the traditional model is still the most common structure, we are seeing an increase in fund structures with a longer investment horizon, increased liquidity for investors, as well as greater accessibility to private equity for investors other than those with sizeable cheques,” says van Lill.
She adds that, in line with the growing incorporation of these new elements, there has also been a trend to list fund entities or vehicles that feed capital raised on public markets into a traditionally structured fund. “This trend is particularly more notable in developed markets, but has recently also materialised in emerging market regions such as Southern Africa.”
Van Lill points to the listing of EPE Capital Partners Ltd (Ethos Capital) – a new hybrid fund structure established through a listed vehicle – as a prime example of this trend playing out in the local market. “Ethos Private Equity made headlines last year when it announced the listing of Ethos Capital on the JSE, resulting in a R1.8 billion oversubscribed public placement. The listing gives the market, including smaller investors, the opportunity to invest in a diverse pool of unlisted small to medium-sized companies through private equity funds managed by Ethos Private Equity.
Another trend that van Lill highlights is the move towards longer term and “evergreen” funds. Referencing discussions held at both the GPEC and SAVCA 2017 Private Equity in Southern Africa Conference held earlier this year, Van Lill says that private equity managers are increasingly finding that a 10 year life of fund may not provide adequate time to take assets to the point of optimal returns.
“This of course is dependent on market cycles or the stage of development of economies, but as a result, managers are increasingly exploring the use of evergreen structures, in which a fund has an indefinite term and limited partners (LPs) have the ability to exit or to change their investment in the fund every couple of years.”
Van Lill says that the appetite for access to longer-term fund structures also links to the nature of transaction management across sub-Saharan Africa, given that managers are expanding their regional scope and are engaging in multi-jurisdictional deals. “There is a growing awareness that business assets in less sophisticated economies require longer holding periods to maximise returns to fund investors.”
Taking into account concerns about currency risk and global economic growth, van Lill concludes that the adoption of these innovative strategies, at a time when swings in global investor sentiment has inhibited fund raising for many fund managers, is proof of the resilience and adaptability of private equity and the ability of the asset class to respond and evolve to meet market and investor needs.