Category Investments

Private equity sees start of recovery

24 November 2020 RisCura/SAVCA

The latest RisCura-SAVCA South African Private Equity Performance Report for the second quarter of 2020 showed glimpses of a recovery, though Covid-19’s impact remains evident.

The report tracks a representative basket of private equity funds in South Africa. The 10-year and five-year ZAR internal rate of return (IRRs) increased from 8.1% and 3.5% to 8.5% and 3.7%, respectively, while three-year ZAR IRRs declined from -2.3% in Q1 2020 to -2.8% in Q2 2020. “The increases are off the back of a slight rebound in market values since March,” says Monwabisi Zikolo, a senior private equity analyst at investment firm, RisCura.

“Private equity’s performance relative to the listed market is somewhat mixed. There was outperformance across the FINDI TRI and SWIX TRI, as well as underperformance against the ALSI TRI and listed benchmarks over the five-year period.”

Over the 10-year and three-year periods, private equity underperformed all three listed benchmarks. The rand hedges predominantly drove the positive performance of the listed benchmarks.

The ALSI TRI is up 23% from March to June this year, with the top five companies’ contribution to the total returns at 12% (these include Naspers, BHP Billiton, and AngloGold Ashanti). The FINDI and SWIX TRIs are up 17% and 22%, respectively, with the top five companies contributing 12% and 10%, respectively.

“Given that private equity is invested predominantly in South Africa, the benchmark returns have benefited from the rand hedges,” Zikolo adds. To make a more direct comparison, RisCura will be launching an SA Inc benchmark, which will only include companies that operate predominantly in South Africa.

The 2007-2008 vintage funds’ performance declined from 8.6% in Q1 2020 to 8.5% in Q2 2020. The 2010-2012 vintage funds reported an IRR of -1.5% in Q2 2020, up from -2.4% in Q1 2020. The 2013-2015 vintage funds reported an IRR of 7.1% in Q2 2020, down from 7.8% in Q1 2020.

The direct alpha earned by private equity relative to the ALSI TRI, FINDI TRI and the SWIX TRI is -0.2%, 1.2% and 1.7%, respectively, over the five-year period. At Q1 2020, these results were comparable at 3.3%, 3.4% and 5.1%, respectively.

USD IRR decreased across the three-year period, reaching -11.5%, down from -11.1% in Q1 2020. The five-year and 10-year periods increased from -3.8% and -1% in Q1 2020 to -3.2% to -0.1% in Q2 2020.

“The slight increase in the USD IRRs across these two periods is due to the ZAR strengthening by approximately 2.2% against the USD over the period of March to June,” says SAVCA CEO, Tanya van Lill. “We look forward to seeing how the asset class will continue to play a role in the country’s economic recovery. Fortunately, the nature of private equity is not short-term and the asset class is poised to weather economic cycles, so it should rally as the world continues to recover from the pandemic too.”

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