INVESTMENT: Old Mutual launches new private equity fund accessible to individuals
Recent Western Cape Business News
Old Mutual Investment Group has launched a new private equity fund targeted at high net worth individuals and institutions. The fund gives investors access to a selection of South Africa’s leading private equity managers.
Market demand and a strong performance track record led to the launch of Old Mutual’s fourth private equity fund of funds. With the company’s other three funds closed to new investors, the new fund gives South Africans affordable access to this appealing asset class.
Old Mutual Private Equity currently manages R3.2 billion in direct private equity funds. Since 2004, the team has successfully invested over R6 billion in 23 transactions, and has returned in excess of R13 billion to investors.
The Old Mutual Multi-Manager Private Equity Fund 3 is their third multi-manager fund and is aimed at both individual and institutional investors. The fund invests in five underlying private equity managers, which include Actis, Ethos and Capitalworks, as well as two of Old Mutual’s direct funds. Managers are selected based on their proven track records, unique investment strategies and depth of experience. Investors gain exposure to over 40 companies across a wide variety of industries, geographies, investment vintages and manager styles - making it a uniquely diversified investment solution for investors wanting to take advantage of the benefits of private equity.
Erika van der Merwe, CEO of the South African Venture Capital and Private Equity Association (SAVCA) says: “This latest fund launch by Old Mutual Private Equity is confirmation that the South African private equity industry is adaptive and alert to investors’ needs. It shows, too, that appetite for the asset class is healthy and that private equity fund managers continue to find opportunities for growth and returns through careful deal selection and rigorous management of assets.”
Investing in private equity was traditionally the domain of institutional investors – as one typically needs around R100 million to invest in a single manager. By pooling investors’ capital within an innovative fund-of-funds structure, investors in Old Mutual Multi-Manager Private Equity Fund 3 can access the diverse portfolio for as little as R100 000. A further benefit of the fund is that it offers an exit-early option. While private equity is a long-term investment, typically 10 years, this fund is underwritten by Old Mutual, which offers clients the option to access their investment early. However, Jacci Myburgh, Head of Old Mutual Private Equity, does caution that there is an exit fee and strongly advises investors to consider this asset class as a long-term hold.
“Private equity involves investing capital into companies that are not listed on a public stock exchange,” explains Myburgh. “Simply put, businesses are bought, held for a reasonably long time (typically five to seven years) and then sold again. The objective during this period is almost exclusively to enhance the value of the business. The reason we believe private equity firms are successful in building better quality businesses is because of an alignment of interest between investors, private equity managers and management. As shareholders, we are also on the management boards, and are actively involved in the running of these businesses.”
The strong appeal of this asset class is above-average return potential. Private equity has historically delivered higher returns than the conventional equity market. The Riscura SAVCA performance survey shows that the South African Private Equity industry posted an average net internal rate of return (IRR) of 17.6% for the three years to the end of December 2012, compared to 14.9% for the FTSE/JSE All Share Index (ALSI). Over the longer term, the outperformance is similar with a 20.6% IRR for private equity versus 18.0% from the ALSI over the 10 years to end December. The target return for Old Mutual Multi-Manager Private Equity Fund 3 is inflation+10% a year.
The inclusion of private equity in a portfolio is also an excellent diversifier. Local and international experience has shown that private equity has a low correlation to the listed equity market. This should then add equity-like returns to a portfolio, but at lower volatility than the listed equity markets. Statistical evidence in the US has shown that private equity funds have, on average, 60% of the volatility of the S&P 500.
“Reasons for these lower levels of volatility,” says Myburgh, “include a preference for businesses with defensive and predictable cash flows, limitations on overly aggressive expansion strategies by management (given the already higher leverage) and a strong focus on delivering to the shareholder.”
Appreciation for private equity has been increasing both globally and locally in recent years. “We anticipate this appeal to continue as more high net worth investors recognise the diversification and performance benefits of private equity. In addition, with the 2011 changes to Regulation 28-governed products, pension funds are now placing more of their assets in private equity,” concludes Myburgh.
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