South African private equity continues to outperform listed market

The RisCura-SAVCA South African Private Equity Performance Report for the third quarter of 2016 shows that South African private equity continued to yield favourable returns relative to listed equity over the ten-year period to 30 September 2016.

The report – which tracks a representative basket of private equity funds in South Africa – shows that the industry delivered a 10-year internal rate of return (IRR) of 17.7% at the end of September 2016, compared with the 16.5% return from the FTSE/JSE Financial and Industrial Index (FINDI TRI*), 13.4% from the FTSE/JSE Shareholder Weighted Total Return Index (SWIX TRI), and 12.0% from the FTSE/JSE All Share Total Return Index (ALSI TRI) over the same period.

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

Year period (at 30 September 2016)Pooled IRRALSI TRIFINDI TRISWIX TRI
10 year17.7%12.0%16.5%13.4%
five year14.5%15.3%22.8%16.8%
three year13.7%8.8%12.7%10.9%

The Public Market Equivalent (PME) – a measure of relative performance, and which has a value of more than one when private equity outperforms listed equity – also reflects the pleasing ten-year performance of private equity relative to the major listed indices.

The PME for the 10-year period to 30 September 2016 when calculated as the relative performance of private equity against the ALSI TRI, the SWIX TRI and the FINDI TRI, exceeds one in all three instances. The greatest outperformance is relative to the ALSI TRI, for which the PME ratio is 1.19.

Public market equivalent (PME) over each period

Year periodPME ALSIPME FINDIPME SWIX
10 year1.191.031.15
five year0.940.770.91
three year1.071.001.03

This quarter’s report includes a further performance measurement indicator: The direct alpha indicator supplements the information included in the PME by reflecting the rate at which an outperformance is generated (i.e. in instances where the PME value exceeds one). The indicator is an annualised excess return over the benchmark. The direct alpha earned by private equity relative to the ALSI TRI over the ten-year period to September 2016 is 5.3%.

Direct alpha calculations over a three-, five- and 10-year period.

Erika van der Merwe, CEO of the Southern African Venture Capital and Private Equity Association (SAVCA) says that private equity returns remain compelling and signify the value of the asset class as part of a diversified, institutional portfolio. “The steady, attractive returns delivered by private equity is particularly appealing in the current volatile, low-returns environment.”

Deborah O’Hanlon, junior associate at RisCura, says: “An annual excess return of 5.3% earned by private equity over the listed market, during a 10-year period, should more than compensate for the relative illiquidity of the asset class. This should make the asset class especially attractive to institutional investors, as they are able to bear the risks associated with illiquidity.”

Van der Merwe adds that, despite the evidence of the returns-boosting nature of private equity in an institutional portfolio, investors in the Southern African market are still in the very early stages of exploring this asset class. “Our research shows that a lack of familiarity with private equity is reported by pension funds as the major reason for their not allocating capital to the asset class. In an effort to encourage inclusion of this asset class into Southern African institutional portfolios, SAVCA continues to intensify its efforts to promote the industry and create increased awareness of its positive performance impact, as well as of the track record of private equity in furthering environmental, social and governance (ESG) initiatives.”

View the full report here.

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