Should more SA pension funds invest in private equity?

Pensions in are an incredibly sensitive subject. Earlier this year — relatively minor — retirement reforms in Southern African caused wide-spread panic. That was largely to do with people’s ability to access their pension funds in the way they want. But if the Southern African Venture Capital and Private Equity Association (SAVCA) is to be believed, there’s room for improvement in the way funds invest people’s pensions too.

According to the association, the allocation by pension funds in Southern Africa to private equity remains limited and few pension funds in South Africa have taken advantage of the increased allocations into private equity, from 2.5% to 10% of assets under management, that are set out by amended pension fund regulations.

In a press release sent to Ventureburn, SAVCA CEO Erika van der Merwe says that one reason for such low levels of pension fund investment in the private equity space is a lack of familiarity with the private equity asset class as one of the primary reasons for not investing in it.

This, she suggests, means that there’s serious work to be done educating pension fund managers on private equity.

“To raise greater awareness of private equity, the private equity industry has to understand the needs and concerns of the spectrum of stakeholders who play an influential role in the allocation of capital by pension funds,” she says.

“This spectrum ranges from investment professionals who are dedicated full-time to the task, to employee representatives who serve part-time as trustees, and also to asset consultants who advise funds on various aspects of investment and the administrative process.”

According to the release, the survey targeted the top 100 pension funds in South Africa and the major pension funds in other SADC (Southern African Development Community) countries. Based on 39 responses, the survey revealed that some 36% of the pension fund respondents have a current allocation or commitment to private equity investments. Of the South African pension funds, 21% increased their private equity allocation subsequent to the regulatory changes that allow South African pension funds the greater allocation to private equity.

Close on two-thirds of respondents indicated that they do not have a mandate nor a current allocation to private equity investments.

“The survey finding of a low number of pension funds taking advantage of the opportunities that private equity offers is consistent with our anecdotal assessment of industry trends,” Van der Merwe says. “With five years having passed since South African regulation paved the way for pension funds to make meaningful allocations to this alternative asset class, it suggests that there is more to the asset-allocation decision than regulatory rules.”

Pension funds indicating through the survey that they have an allocation to private equity range from large to small – although larger funds are more likely than their smaller counterparts to have a private equity allocation. Of those in the sample that have private equity exposure, 35% have less than R5 billion of assets under management, 30% have between R5 billion and R35 billion of assets under management, and 35% have more than R35-billion of assets under management. These funds comprise defined benefit, defined contribution and hybrid funds, and more or less an equal number of pension, provident and standalone funds.

For survey respondents, the most common means of exposure to private equity investment is through a fund-of-funds structure, with either a South African or a broader African mandate. A less prominent route is to invest directly into one or multiple private equity funds.

An analysis of respondents who indicated that they do not have a private equity exposure, suggests that smaller pension funds and pension funds which are defined contribution plans, are less likely to opt for private equity. “The top reasons given by this group for not investing in private equity are, firstly, unfamiliarity with the asset class, secondly, the liquidity characteristics of private equity and, thirdly, a lack of internal capabilities at pension fund managers to oversee a private equity programme,” says Van der Merwe.

Given its positive attributes, including high-returns potential and portfolio diversification features, Van der Merwe says that the omission of private equity investment by many pension fund managers is a significant missed opportunity. Over the past decade, returns to investors in private equity in South Africa was 20.7%, compared with a return of 14.9%.on.the JSE All Share Index.1

The research also reveals that the majority of the surveyed pension fund managers employ asset consultants for certain support services. “While the level of participation and influence of asset consultants vary considerably according to survey responses, it is evident that the role of advisors to the pensions industry is critical.”