Covid-19 may improve private equity returns

During a period of immense financial uncertainty and low economic growth, the latest RisCura-SAVCA South African Private Equity Performance Report might provide some comfort to investors facing the carnage of capital markets. It shows that private equity in the country continues to outperform listed equity over the short and medium-term, as of September 2019.

The latest edition of the quarterly report was released on 25 March 2020, and tracks the performance of a representative basket of South African private equity funds. It provides local stakeholders with some insight into industry returns in the short term and has established a benchmark for private equity performance over the longer term since its inception in September 2010.

The 2019 third-quarter report, which tracks a representative basket of private equity funds in South Africa, shows outperformance across all three listed benchmarks over the three-year and five-year periods. Over the 10-year period, private equity underperformed across all three listed benchmarks.

SAVCA  is the industry body and public policy advocate for private equity and venture capital in southern Africa, which represents about R165-billion in assets under management from a 170-strong membership base that forms part of the regional private equity and venture capital ecosystem. 

The active return on investment, earned by private equity relative to the All-Share Total Return Index (ALSI TRI) and the Shareholder Weighted Total Return Index (SWIX TRI)  is 2.9% and 5.4%, respectively, over a three-year period. For the second quarter of last year, the comparable results were 1.6% and 4.2%, respectively.

SAVCA CEO Tanya van Lill says that South African private equity has managed to remain resilient despite high volatility and low growth.

“We are facing an extremely challenging investment environment as markets around the globe take strain due to Covid-19. However, we believe that private equity’s performance will remain favourable relative to the listed market,” she says. 

According to the report, the 10-year and three-year internal rate of return (IRR) in rand terms declined from 9.9% and 7.9%  in the second quarter of 2019 to 9.6% and 7.5% in the third quarter, respectively. The five-year rate remained unchanged at 12.1% in quarter three.

In US dollar terms the IRR weakened over the three-year and 10-year periods, reaching 4.3% and 2.0%, respectively, down from 10.3% and 3.0%.  Over the five-year period, however, the IRR improved from 5.2% in quarter two to 5.5% in the third quarter of 2019.

The reason for the large decline in the dollar IRR division for the three-year period is due to the rand weakening by approximately 10% against the US dollar between September 2016 and September 2019.

Monwabisi Zikolo, a senior private equity analyst at the investment firm RisCura, says that the prospects for private equity investments remain favourable despite uncertainty in local and global markets.

“We expect to see increased capital flowing into sectors such as healthcare and infrastructure, and these investments have demonstrated their ability to generate financial returns, while also providing crucial products and services.” 

Meanwhile, the Covid-19 fallout continues to hit firms across the world, both in terms of supply and demand, and the predicted ensuing recession is likely to change how we live in the future. While the outbreak has unsettled lives and businesses across the world, delaying deal processes and fundraising, there are “new world” sectors that will do well, Private Equity Wire reports.

As pointed out by Nigel Green, chief executive and founder of deVere Group, the current disruption will lead to investment opportunities opening up in new areas.

“New industries will come into their own and, as ever, there will be winners and losers,” says Green. “This will mean job losses in some sectors and huge – possibly unprecedented – job and investment opportunities in others.”

Green believes it could speed up the Fourth Industrial Revolution, including advances in AI and mobile supercomputing. 

“Big tech is just one likely winner,” he says. “The likes of Apple, Facebook, Amazon, and Google’s parent company Alphabet have immense cash reserves to continue, maybe even bolster, research and development and to sustain their business operations.”

Other sectors that may do well, in Green’s view, are pharmaceutical and healthcare firms, delivery brands, supermarkets and manufacturers of electronic goods, such as fridges and freezers.

“Before shifting focus towards readjusting portfolios, however, many private equity firms are mainly preoccupied with sifting through the turmoil that the recent Covid-19 havoc has wreaked across current investments,” the web portal concludes. BM