Forget making ‘quick’ money in private equity
Momentum Wealth launched South Africa’s first international private equity opportunity in October this year. Known as Momentum International Private Equity investment the product is aimed at pension funds, high net-worth individuals, trusts and companies.
Ivan Missankov, manager of Momentum’s International Private Equity investment is on record that “private equity is beginning to attract a lot of attention as an investment vehicle for high net-worth individuals.” FAnews Online spoke to Missankov to learn more about opportunities in the international private equity market, and find out what lured institutional investors to this type of investment.
Market beating returns will always prove popular
“Individual investors have not traditionally invested in private equity – so it is a new asset class,” said Missankov. And “the short answer [to why they invest there] is simply investment performance.” A recent survey reveals that South African private equity has returned an 18% premium on JSE listed shares. Missankov estimates that even after fees the performance premium in domestic private equity is 12% on the 300% already achieved from listed equities since 2003.
International surveys reveal similar trends. Thompson Financial and National Venture Capital Association recently showed that private equity provided an annualised 10-year return twice as high as that achieved by the NASDAQ and the S&P 500 over the same period. By taking their private equity investments offshore, South African investors will be chasing this higher return and simultaneously benefit from currency diversification.
Missankov was quite clear on the investment term. Money will have to be committed for at least 14 years. “Money that is committed now may only be invested nine years from now,” said Missankov. Progress can be slow in the private equity environment, with some funds taking as long as four years to find suitable managers to negotiate private equity transactions.
Fees charged on committed capital
Investors in private equity need to understand a number of aspects of this type of investment. Top of the list (and already mentioned) is that private equity deals take time to complete. There is no quick and easy way to negotiate a transaction involving hundreds and millions of rand.
Investors also have to realise that private equity investment management fees are not cheap. “Private equity is expensive – make no mistake about it,” says Missankov. He is “not convinced that the fee structures that managers charge are in the best interest of consumers. Managers typically charge a 2% annual fee on committed funds – and this fee is charged regardless of whether the funds have been called for.” This said the return premium suitably compensates for these higher fees.
Missankov provided an example of how a typical private equity investment would function. Once obtaining a commitment from an investor (say R100 million) the private equity manager calls for the funds as and when required. This is to avoid sitting on cash. “The fees that they charge are not based on invested value, in other words what they have drawn down and invested, but on commitment. Even if the fund has only drawn down 10% in the first year, they will still charge fees on the R100 million.”
Further to this, if all committed funds have been invested and the value of the investor’s portfolio has fallen, the manager still charges on the entire committed amount. Once the investment performs you can expect to pay carrying fees.
SA making the rules in Asia
Momentum’s international private equity investment will be 80% in developed markets (two thirds US, one third Europe – of which half will be UK). Because of the sheer size of the US and European markets, Momentum has partnered with Fund of Funds manager Goldman Sachs Private Equity Group and Harbourvest Partners, the largest private equity player in the world.
The remaining 20% will be in emerging markets, specifically Asia (China and India). Momentum has adopted a slightly different approach to other international private equity plays in this region. The reason is that American and UK private equity Fund of funds have ‘neglected’ the region. Missankov mentioned that “against [Momentum’s] expectations, none of the global Fund of Funds groups cover the globe in the way one would expect.” Not only are percentages of funds invested in these region low; but staff on the ground are in short supply.
For this reason, Momentum chose to partner with RMB Ventures, RMB’s direct private equity team. RMB Ventures has been operating in Australia for four years and has now established teams in India and China to follow the model of recruiting managers on the ground. These managers will find and conclude viable private equity deals using the teams emerging market experience.
Editor’s thoughts:
Although private equity investment is expensive when compared with ordinary equity investment the returns appear to adequately compensate for this expense and the concomitant higher risk. It has been suggested that pension funds could commit as much as 10% of available resources to this investment class. Do you think private equity is suitable for retirement funds? Send you comments to gareth@fanews.co.za
