2 minute read
Opportunities in private markets in difficult times
RORY ORD Head: Private Markets, 27four Investment Managers
The patience of both institutional and retail investors is wearing thin after several years of poor performance of listed equity markets. The JSE All Share Index is at the same level it was in 2015, meaning the bulk of investors’ equity allocations have given no return. At the same time, the pool of investible companies has shrunk, meaning that the risk investors take on through these allocations has increased. Conventional wisdom is to offshore as much exposure as possible, and most investors and retirement funds have maxed out these allocations.
An alternative to consider for a smaller allocation lies in access to the thousands of companies operating in South Africa outside of the JSE. Research from Finfind done in 2018 shows that there are at least 8 000 to 10 000 companies in South Africa with at least R100m of turnover.
Companies of this size are typically successful family-owned businesses operating within a larger sector and are ripe for expansion.
Private equity funds will invest growth capital into these businesses, and also provide them with strategic advice, access to networks for expansion, and provide M&A capacity to help these companies consolidate and achieve greater scale.
Black private equity funds in particular do all of this, and can also bolster the B-BBEE status of investee companies by conferring black ownership. This has been a major driver of deal activity and has contributed to the 300 to 500 deals per year completed by the private equity industry as a whole.
While there are many generalist funds investing across sectors, there are also specialists investing in areas such as healthcare, education, telecommunications, renewable energy and food production. This highly focused type of investing can only be achieved in private markets. Within 27four’s private markets programme, some recently completed deals include backing a technology company creating components essential to drone delivery, private hospitals expanding access to healthcare across the country, schools providing quality education at low cost, digital tertiary education, telecommunications infrastructure and software development. The investment pipeline is no less bright, with opportunities in fibre, waste treatment, agri-processing and logistics.
Historically, these kinds of investments have only been available to institutional investors able to commit tens of millions of rand to private equity funds. However, 27four will soon offer private market access in smaller increments. This will give investors access to a highly diversified portfolio of private markets investments through a regulated product.
With all the negative news generated on a daily basis in our country, it is easy to forget that there is also a huge amount of innovation, and that the bulk of the country’s business takes place outside of the handful of companies covered in the market news each day. These companies are smaller and more agile than those in the listed markets and, with the help of private equity backing, can grow and thrive, even in tough environments.
