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Private equity investing in SA still under wraps

19 October 2006 Angelo Coppola

Why worry about liquidity; why is the regulator acting as a governor; what are pension funds doing, and why arent we following international investment trends?

Riaan van Dyk and Ivan Mossakov of momentum, two of the authors of a recently released research paper into private equity and its suitability as an investment option, say that pension funds should be looking at investing 2.5% and 5% of the funds assets into private equity on the understanding that its about a long term commitment of up to 10 years.

He downplayed the liquidity concerns raised by some pension funds by citing Calpers the California public employees pension fund, as an example who have invested 25% of its funds in private equity.

As a matter of fact, the Calpers pension fund is bigger than the total South African pension fund industry, which is valued at R1.2 trillion. Interestingly enough the private equity component of the local funds in private equity is a miniscule R40bn, and most of the investors in this are foreigners.

As an matter of interest the regulations call for pension funds to invest up to 2.5% in unlisted investments and 5% into the other category.

In terms of the way forward, the local market will be dominated by BEE for the next five to 10 years, and this is an ideal opportunity for private equity.

Internationally Israel is operating at between 19% to 20% of GDP. In South Africa we are operating at 3% of GDP. The flipside of the coin is that If it becomes to fashionable then the returns will drop. Performance returns locally are higher than other countries where the markets are more volatile.

On a business level, private equity is an opportunity for business owners to extract value, although the public markets will see it as a potential threat. Looking at it from an investment perspective, a secondary market is needed and will provide some liquidity to the market.

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