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SA private equity continues steady performance

Cape Town - The latest RisCura-SAVCA South African Private Equity Performance Report, for the first quarter of 2016, shows that the SA private equity industry remains resilient, delivering a ten-year internal rate of return (IRR) of 19% at the end of March 2016, up from 18.5% reported in the previous quarter at the end of December 2015.

The latest report, which tracks the performance of a representative basket of private equity funds in South Africa, also shows that local private equity continues to outperform the South African listed equity market over a ten, five and three year period to 31 March 2016.

Compared with the 19% returned by private equity in the ten years from 1 April 2006 to 31 March 2016, the FTSE/JSE All Share Index (ALSI) yielded 13.1% over the same period.

Private equity also outperformed the FTSE/JSE Shareholder Weighted Total Return Index (SWIX TRI), which recorded a 13.8% return, and the FTSE/JSE Financial and Industrial Index (Findi TRI), which yielded 17.6%.

While a ten-year measurement period is considered appropriate for private equity, given the long-term characteristics of the asset class and the locked-in nature of typical fund structures, a similar pattern of returns is evident over shorter time periods.

On a returns basis, the three year and five year returns achieved in private equity have outperformed the listed market over the equivalent periods. Over five and three-year periods, private equity funds in this market delivered 14.9% and 14.6% respectively, which compares favourably with the 13.6% and 12.8% recorded by the ALSI over the equivalent periods.

Disciplined industry

Erika van der Merwe, CEO of the Southern African Venture Capital and Private Equity Association (SAVCA), says that the performance is indicative of an industry that maintains a disciplined focus on careful deal selection and management, with a view to delivering positive outcomes – of a financial, social, environmental and governance nature – for investors.

“In an uncertain global, regional and local setting, private equity fund managers excel through their ability to maintain a long-term investment view, and via their multi-disciplined support of investee companies through short-term economic cycles.”

Deborah O’Hanlon at RisCura, says “the long-term nature of private equity has sheltered investors from the increased volatility in South Africa’s listed markets over the past year. Because the IRRs in private equity are calculated partially based on the unrealised value of assets, the valuations of these assets will only be fully tested on exit. This will prove or disprove the robustness of the returns, and with the typically conservative nature of valuations in South Africa, we may see further improvements in returns as the market stabilises and exit activity increases".

The recently released SAVCA 2016 Private Equity Industry Survey showed that funds raised by private equity managers investing in South Africa and other African markets grew by R15bn in 2015, to a total of R29bn – the highest on record for the industry.

“This ability of local private equity fund managers to raise capital at this scale is an endorsement of the performance track record of the industry, and of investors’ confidence in fund managers’ capacity to deliver future returns,” Van der Merwe says.

Van der Merwe adds that, intertwined with its returns-boosting role in institutional portfolios, South African private equity continues to support local and regional economic activity by activating the flow of capital into Southern Africa and sub-Saharan Africa.

“With the scale of funds raised in recent years, private equity managers now have a hefty R40.6bn in undrawn commitments from investors. This capital will be used within the next few years to fund acquisitions in the region and to support capital expansion programmes within investee companies.”

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