INVESTING
31 December 2020
Opportunities in private markets in difficult times
RORY ORD Head: Private Markets, 27four Investment Managers
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he 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
27FOUR WILL SOON OFFER PRIVATE MARKET ACCESS IN SMALLER INCREMENTS 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
ALBERT BOTHA Head: Fixed Income, Ashburton Investments
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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
Chaos and clarity
he calm before the storm. The eye of the all been indulging. For those lucky enough to hurricane. Uncertainty and silence have be in the US, Japan, Germany or other zero rate long been understood to not only be countries, this has not been too much of a burden, opposites, but intrinsically linked. as continuously falling yields have softened the As the words form on the page, there is little cost of interest. For corporates, this was further that is certain in the world. While the major news reinforced by central bank support, leading to a networks have called the election for Joe Biden, historically low cost of debt for everyone involved. there are already calls for recounts and court Yet we know that once you are in this space, it is challenges. Looking at the shambles of the final very hard to leave. Even the smallest rise in rates polling, in what was described by pundits from the can lead to a doubling of the cost of debt, leading left and the right as the most existential election to unsustainable government finances and failing in the last 100 years, it is truly shocking. With companies. So, we sit with the inefficient allocation more and better data than ever before and the most sophisticated methods, this state of affairs leaves one disheartened. What was supposed to be a blue wave passed with both sound and fury, but resulted in barely a ripple. The current state of the US elections left us no more certain about our future than a week ago – especially given that it is likely that the US Senate will EVERYWHERE remain in Republican hands. WE LOOK, WE SEE Yet uncertainty and vulnerability can focus the RISING DEBT mind, stripping away the illusion that we have more than the slightest insight into what the future may hold, focusing our thoughts on what can be predicted with any degree of certainty. Everywhere we look, we see rising debt. Governments, corporates and households have
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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.
of government finances and the continual survival of zombie companies*. The logical result is lower growth. We know that higher government debt levels (75%-100%) lead to lower growth for the countries involved – and that the higher this debt becomes, the more drastic the effect. We also know that each additional rand or dollar spent by the government has a slightly lesser effect on gross domestic product (GDP) growth compared to the previous one. We know that demographics determine destiny and that much of what is currently described as the West and central Asia is in demographic decline. Once again, lower growth and lower inflation result. It is hard to see our world rebounding into high growth and high returns. Inflation and growth everywhere are likely to remain subdued, and South Africa will be no exception. Our consumer price index (CPI) numbers are likely to hover around 3% for the rest of the year. In this world, earning 5%-9% on income funds may be much more certain than aiming for double digit numbers in other assets and both falling short, while facing volatility. If this election has taught us anything, it is that certainty is illusive, and it should be valued. * Zombie companies – Companies that can only afford to repay the interest on loans, not principle or capital expansion.
