HOW PRIVATE EQUITY OFFERS BIG RETURNS

Capital returned to private-equity investors doubled in 2016, despite tepid economic growth across Africa, the latest Southern African Venture Capital and Private Equity Association survey shows.

These investors pocketed R18.3bn, or 123.2% more than in 2015. This was about twice the capital that pension funds, development financiers and insurers invested initially.

The increase took place against a difficult economic backdrop in sub-Saharan Africa, with growth in the region falling to 1.4%, the lowest growth rate in more than 20 years, according to the IMF.

“We’re finding that a lot of fund managers are holding on to assets a little bit longer than what is the norm due to the economic environment,” said association CEO Tanya van Lill.

Investors were not fazed and they stayed put because of the lucrative nature of the asset class, which had delivered a 11.4% annual growth rate in capital returned to investors since the association began its survey, which covered 61 participants representing 96 funds in 2017.

The asset class has generated a 15.8% internal rate of return after fees were deducted for the past 10 years, compared with the 11.4% return generated by the Shareholder Weighted All-Share (Swix) Total Return index, which measures the net return of shares actively available in the market. The asset class has, however, experienced a decline in fund-raising activity, managing to raise just R10.2bn, compared with R27.5bn in 2015.

“In 2015, there was one particular fund that raised R15bn. This caused a spike in fundraising,” said Van Lill. Two private-equity firms’ decisions to list on the bourse did not indicate fund raising from traditional investors had dried up, she said.

The survey showed 40.2% of funding was raised from pension funds, while development finance institutions such as the Industrial Development Corporation contributed 20.6% and insurers 19.6%.

Corporations, banks and individuals accounted for the rest. More than 73% of the funding was sourced from SA, and was mainly invested in the rest of Africa.

In 2016, Ethos Private Equity, the continent’s largest private-equity firm, listed Ethos Capital Partners, raising R1.8bn and giving retail investors access to three of its funds. Universal Partners listed a few months later, raising R1.3bn.

“Through listing a permanent capital vehicle, the funds address liquidity concerns some investors may have,” she said.