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SA private equity is not immune to the lower return environment

The latest Riscura-SAVCA performance report highlights the challenging landscape.

SA private equity is not immune to the lower return environment

Over the three years to the end of 2019, the FTSE/JSE All Share Shareholder Weighted Index (SWIX) delivered a total return of 5.4%. This low level of growth has encouraged many investors to consider alternative sources of return.

Private equity has been one of those. However, the latest Riscura-SAVCA South African Private Equity Performance Report shows that the returns from a representative basket of private equity funds were even weaker.

The private equity basket delivered an internal rate of return (IRR) of 4.4% over these three years.

As the table and graph below show, private equity under-performed all three comparable listed equity benchmarks over these 36 months. It most substantially under-performed the FTSE/JSE All Share Index, producing a negative alpha of -2.80% relative to this benchmark.

Over five years, however, private equity substantially out-performed. Over this more extended period of JSE weakness, private equity funds have produced an IRR of 8.8%.

Source: Riscura-SAVCA South African Private Equity Performance Report (click to enlarge)

The 8.8% IRR from private equity funds over the past five years is also in line with the 10 year returns from the asset class. Even these longer-term returns would, however, be below what private equity investors may feel entitled to expect.

Given the illiquid nature of private equity, the substantial under-performance relative to all three JSE indices over the past 10 years is eye-catching. The liquidity premium would seem to be absent if private equity is unable to even match listed equity returns over the long-term.

This may be a consequence of the weak South African economic environment. This is illustrated in the graph below, which shows rolling returns from the private equity basket.

Source: Riscura-SAVCA South African Private Equity Performance Report (click to enlarge)

Up until 2016, private equity in South Africa was delivering returns in the mid- to high teens over all measurement periods. This has, however, declined noticeably in recent years.

The impact on three-year rolling returns is most apparent. These have dropped sharply over the last two years in particular.

This is indicative of what Riscura private equity analyst Monwabisi Zikolo refers to as the ‘significant headwinds’ facing the asset class. He does however believe that ‘the prospects for private equity investments remain favourable’.

For private equity to be truly compelling, however, it probably needs to show a more uncorrelated performance to the JSE. If South Africa’s struggling economy is pulling down both listed and unlisted returns so noticeably, the arguments in private equity’s favour may be harder to sustain.

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