SA Private Equity takes a knock but will rally

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The latest RisCura-SAVCA South African Private Equity Performance report reveals that private equity, like many asset classes, couldn’t quite escape the impact of COVID-19.

The 2020 first quarter report tracks a representative basket of private equity funds in South Africa.

Monwabisi Zikolo, a senior private equity analyst at investment firm RisCura, says that South African private equity is a resilient asset class. With the COVID-19 crisis hitting South African shores late in March, the impact of the pandemic on the market and asset prices is evident in the first quarter performance for both public and private markets.

“The results for the first quarter of the year are to be expected, but the second quarter results, we believe will reveal that resilience has remained intact, relative to the listed market,” says Zikolo. 

South African private equity offers institutional investors the opportunity to invest in an asset class that has historically outperformed listed equity over the long-term. It does, however, differ in nature from quoted equity. Typically, private equity fund investments show a low correlation to listed equity markets and are relatively illiquid, particularly in the early years.

According to the report, private equity’s performance relative to the listed market remains favourable, with outperformance across all three listed benchmarks over the five-year period. Over the 10-year period, private equity outperformed the ALSI TRI and SWIX TRI and underperformed the FINDI TRI. While over the three-year period, the private equity outperformed the SWIX TRI, underperformed the ALSI TRI, and performed the same as the FINDI TRI.

The direct alpha earned by private equity relative to the ALSI TRI, FINDI TRI and the SWIX TRI is 3.3%, 3.4% and 5.1%, respectively, over the five-year period. At Q4 2019, these results were comparable at 2.9%, 3.8% and 3.9%, respectively.

The 10-year, five-year and three-year ZAR IRRs declined from 8.8%, 8.8% and 4.4% in Q4 2019 to 8.1%, 3.5% and -2.3% in Q1 2020, respectively.

The 2007-2008 vintage funds’ performance declined from 8.7% in Q4 2019 to 8.6% in Q1 2020. The 2010-2012 vintage funds reported an IRR of -2.4% in Q1 2020, down from 3.2% in Q4 2019. The 2013-2015 vintage funds reported an IRR of 7.8% in Q1 2020, down from 12.4% in Q4 2019.

USD IRR decreased across the three-year, five-year and 10-year periods, reaching -11.1%, -3.8% and -1%, respectively, down from 3.6%, 4.4% and 1.7% in Q4 2019.

“The reason for this large decline is due to the ZAR weakening by approximately 26.8% against the USD from December 2019 to March 2020,” says SAVCA CEO, Tanya van Lill. “Private equity remains a favourable long-term investment that has historically proven to navigate downturns and unfavourable economic cycles, and has a valuable role to play in the region’s economic recovery,” she concludes.