Momentum Wealth releases new retail International Private Equity investment

"Private Equity outperforms Listed Equity by 18% a Year"

In order to meet growing demand for private equity investment, Momentum Wealth launched the Momentum International Private Equity investment on 1 October 2007. This new and innovative product is aimed at pension funds, high net worth individuals, trusts and companies. Momentum Wealth CEO, Riaan van Dyk reported immediate strong interest.

The product will invest internationally in a diversified selection of top-quartile private equity opportunities, including both primary and secondary funds in both developed and emerging markets.

The new international product builds on the success achieved by Momentum's innovative South African Private Equity Fund of Funds. The domestic fund was launched on 1 August 2003, the first product of its kind in the South African market, whose investments have returned in excess of 60% per annum since the time of launch.

Late in 2006, Momentum Wealth also released groundbreaking research, in which a constructed aggregate of 11 South African private equity funds was found to have produced a return premium of 18.0% per year, before costs, relative to the FTSE/JSE Africa All Share Index, and a premium of 16.8% a year relative to the FTSE/JSE Africa Small Cap Index. Private equity assets were found to increase return expectations significantly in the pension fund portfolio, while at the same time maintaining an appropriate level of risk.

Internationally, the investment case is equally attractive. According to Thompson Financial and the National Venture Capital Association, the annualised 10-year return from private equity, at 11,4%, was almost twice as high as that achieved by the NASDAQ and the S&P 500 (6,2% and 6,6% respectively). By investing in Momentums new product, individual investors and many pension funds will, for the first time, be able to access international private equity assets, with the associated returns and currency diversification benefits.

"Even before the survey, private equity was beginning to attract a lot of attention as an investment vehicle for high net worth individuals, said Ivan Missankov, lead author of the paper and manager of Momentum's International Private Equity investment.  Missankov believes the research will now attract pension funds to an equal extent.  Like hedge funds before it, he believes private equity is poised to become ubiquitous among pension funds, once they recognise the attractions of the opportunity, particularly the low correlation of private equity (being unlisted) to the performance of conventional listed asset classes. It holds particular attraction to those desiring a long-term real rate of return.

Encouraging pension funds to look more closely at international private equity, Missankov says Momentum's research paper investigated the investment performance of a sample of 11 South African private equity funds over a 13-year period.

Missankov continues: "The results of the investigation squarely point to significant benefits for pension funds that invest in private equity. The fact that, if a pension fund had invested in the independent private equity funds considered in the study over the last 13 years, a premium of 18% per annum above listed equity could have been attained, was but one of several benefits."

Van Dyk, who is also one of the authors of the paper, adds: "Expected investment performance and diversification benefits should be powerful drivers for the allocation of assets by pension funds to private equity investment, as should be the opportunity to meet black economic empowerment (BEE) objectives, to which private equity is particularly suited. The investment horizon of private equity is especially suited to the long-term nature of pension funds. Liquidity should not be a significant concern, assuming a relatively low allocation of 5% of assets and what appears to be a substantial liquidity premium."

In fact, investors generally overpay for the right to liquidity, whereas pension funds often have a requirement for long-term investment horizons and are consequently overpaying for a luxury they may not need. Private equity investments are only for those who can afford to have their capital locked in for long periods of time, and who have a higher appetite for risks than conventional securities. The higher risk is balanced by the potential benefit of higher returns.

Examining private equity, in the context of pension fund asset allocation, a mean-variance analysis found that an allocation by pension funds of up to 10% of assets would improve the efficiency of a portfolio and contribute to meeting real return investment objectives.

"With respect to asset allocation, the results led us to conclude that private equity potentially has a significant role to play in a strategy designed to achieve real rates of return, and may safely be held up to its regulatory maximum of 5%, and even up to 10% where there is no regulatory maximum. These results are consistent with international practice, where large US pension funds are known to invest up to 7-8% or greater proportions of their assets in private equity investments," says Van Dyk.

Globally, private equity has become one of the central themes of corporate deals over the past 18 months. "Although the theme is not new, either domestically or internationally, the trustees of pension funds in South Africa and their consultants have not previously included or considered private equity when designing and implementing their investment strategies.

"This has largely been due to the lack of performance data, as well as concerns about liquidity, and a degree of general lack of understanding of private equity," says Van Dyk.  Momentums contribution to research (while not offered as conclusive as further research is pending) is making inroads in addressing this knowledge shortfall.

"In the absence of a local benchmark, the investment performance of private equity remained a contentious issue, and various researchers presented mixed messages," concludes Van Dyk

Private equity is not without risk, but it has the advantage that the company's management is totally aligned with its ownership, without distractions, and is highly incentivised. The result is that there have been few failures of private equity deals anywhere. Private equity is not a separate asset class, though like hedge funds, it has a set of unique characteristics that mean the funds as opposed to the underlying assets might be considered so.

Although private equity is unregulated, the international practice has developed of limiting investors to high net worth individuals, by restricting investors to those with a minimum $1-million net worth. Momentum Wealth has placed its benchmark at a minimum of R1-million.

The International Private Equity product may be accessed via two products administered by Momentum. These include the Flexible Endowment Option (R1-million minimum) or the RMB Investment Services Personal Portfolio ($150,000 minimum), the latter being for investors wishing to make use of their R2-million offshore allowance or money already legitimately offshore.

The closed-end product opened for new business on 1 October and will remain open until 30 November 2007, though Momentum has reserved the right to keep it open until 30 June 2008, should interest warrant the extension.