SA private equity performs favourably against listed markets

Tanya van Lill, CEO of SAVCA.

Outperforms ALSI TRI and SWIX TRI over all three periods analysed.

The latest Q2 2017 RisCura-SAVCA South African Private Equity Performance Report reveals that private equity’s performance relative to listed markets remains positive. The quarterly report, which tracks the performance of a representative sample of South Africa’s private equity funds, shows that industry has outperformed the FTSE/JSE All Share Total Return Index (ALSI TRI) and the FTSE/JSE Shareholder Weighted Total Return Index (SWIX TRI).

According to the report, the private equity industry also delivered a 10-year (in Rand terms) internal rate of return (IRR) of 13.8% at June 2017, compared to the 5-year IRR, which stands at 13.7%.

Graph: Pooled IRR by time period (ZAR) Pooled IRR by time period (ZAR) 

USD IRR decreased marginally over the 10-year and 3-year time periods. The USD return measures ended Q2 2017 at 9%and 5.6% respectively, while the 5-year USD IRR improved over the quarter from 1.3% to 3%.

“Although we are observing a continued downward trend in 10-year IRR - against the backdrop of a volatile economy, coupled with a decline in investor confidence and political uncertainly - private equity returns compared favourably to all three listed markets over the three-year period specifically, reflecting a public market equivalent (PME) greater than one,” comments Tanya van Lill, SAVCA CEO.

The greatest outperformance was recorded against the ALSI TRI with a PME measure of 1.19, while direct alpha reached 8.5% and 5.9% relative to SWIX TRI and FINDI TRI, respectively.

Table: Compound Annual Growth Rate for each period compared to private equity IRR

Van Lill attributes this to the innovative and sophisticated risk assessment models that private equity players utilise when making investment decisions, and the realisation of value during the investment period.

“What’s more, is they have access to a wide network of business partners and strategic advisors, and actively provide on-the ground support in order to push through necessary changes and shift strategy to meet market requirements.”

In terms of newer funds (vintage 2013 – 2015), report statistics recorded a lower ZAR IRR when compared to other fund vintages.

“These newer funds are still in the early stages of the private equity J-curve, so it is normal for them to have lower returns than the earlier vintage funds. We would expect to see their returns improve as the investments mature,” explains Deborah O’Hanlon, Junior Associate at RisCura.

Concludes van Lill, “Going forward, private equity will certainly continue to deliver attractive returns amid a challenging macro environment. Value creation will continue to be a focus, as will skilled and experienced portfolio partners.”

For full report click here.