Chronicle Editor
JOHANNESBURG. — Despite regulatory changes to allow higher allocations to private equity and indications that the asset class could offer a return premium, the exposure of pension funds to private equity remain limited, a new survey suggests. According to the Southern African Venture Capital and Private Equity Association’s (Savca) inaugural New Frontiers report, which gauged perceptions of some of the top 100 local and other major pension funds in the SADC region about private equity, almost 60 percent of respondents had no allocation to the asset class. The study was conducted by way of an electronic survey during the last quarter of 2015. Of the 39 respondents, 14 had an allocation to private equity (ranging from 2,5 percent to 10 percent of assets under management), 23 had no allocation and two did not disclose their position.
Regulation 28 of the Pension Funds Act allows pension funds to allocate up to 10 percent of their assets to private equity from an earlier 2,5 percent.
Erika van der Merwe, CEO of Savca, said very few pension funds have taken advantage of the regulatory changes.
“In our view that is a missed opportunity for pension funds and their members.”
Private equity is a long-term, alternative asset class where fund managers raise third-party funds from various classes of investors to buy assets that are predominantly privately held.
According to the study, the main reason for pension funds’ reluctance to invest in private equity is a lack of familiarity, highlighting the need for education and exposure, Van der Merwe said.
“It (investing in private equity) isn’t as straight-forward as listed equity or bonds or cash or even property.”
It requires deep thought, careful selection and the management of that program, she says.
Pension funds were also concerned about the illiquid nature of the asset class and the long-term (typically ten year) commitment required.
Van der Merwe said some funds also cited a lack of internal capability to oversee a private equity programme. The study’s results seem broadly in line with the findings of RisCura’s 2015 Bright Africa study, which found that South African pension funds have the second-lowest allocation to “other assets” (which includes private equity) among ten African markets at 2,3 percent.
A 2014 study by the Coller Institute of Private Equity found that pension funds globally have around 5 percent allocated to private equity.
Van der Merwe said over a ten to 15-year period 5 percent is a viable target for local pension funds, but it is doubtful whether there will be a meaningful change in the next five years.
Dave Stadler, chairperson of Savca, said 5 percent is still quite prudent against the backdrop of the allowed 10 percent allocation.
Some overseas endowment funds who have invested in this space for far longer have allocations of close to 20 percent, suggesting that they are happy with the returns that have been generated. Van der Merwe said although it is not always the case, private equity tends to outperform listed equity over the long-term. According to RisCura and Savca’s Private Equity Performance Report for September 2015, returns to investors in private equity in South Africa was 20,7 percent over a ten-year period compared to 14,9 percent for the JSE All Share Index. — Moneyweb.
Online Reporter