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GPs shift towards fund structures with a longer investment horizon

Africa Global Funds
June 6, 2017, midnight
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There appears to be a gradual, yet notable shift in the approach taken by both South African and global private equity fund managers towards fund structuring, according to the Southern African Venture Capital and Private Equity Association (SAVCA).

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There appears to be a gradual, yet notable shift in the approach taken by both South African and global private equity fund managers towards fund structuring, according to the Southern African Venture Capital and Private Equity Association (SAVCA).

Tanya van Lill, CEO of SAVCA, said that, while the traditional approach to private equity fund structuring involves managers raising third-party capital from large institutional investors - and structuring this capital into closed-ended funds governed by a partnership structure, with a typical life of 10 years - there is a shift toward managers adapting this model to incorporate new elements. 

“Although the traditional model is still the most common structure, we are seeing an increase in fund structures with a longer investment horizon, increased liquidity for investors, as well as greater accessibility to private equity  for investors other than those with sizeable cheques,” said van Lill.

She added that, in line with the growing incorporation of these new elements, there has also been a trend to list fund entities or vehicles that feed capital raised on public markets into a traditionally structured fund. 

“This trend is particularly more notable in developed markets, but has recently also materialised in emerging market regions such as Southern Africa.”

Van Lill pointed to the listing of EPE Capital Partners (Ethos Capital), a new hybrid fund structure established through a listed vehicle – as a prime example of this trend playing out in the local market. 

“Ethos Private Equity made headlines last year when it announced the listing of Ethos Capital on the JSE, resulting in a R1.8bn oversubscribed public placement. The listing gives the market, including smaller investors, the opportunity to invest in a diverse pool of unlisted small to medium-sized companies through private equity funds managed by Ethos Private Equity.”

Another trend that van Lill highlighted is the move towards longer term and “evergreen” funds. 

She said that private equity managers are increasingly finding that a 10 year life of fund may not provide adequate time to take assets to the point of optimal returns.

“This of course is dependent on market cycles or the stage of development of economies, but as a result, managers are increasingly exploring the use of evergreen structures, in which a fund has an indefinite term and limited partners (LPs) have the ability to exit or to change their investment in the fund every couple of years,” she said.

Van Lill said that the appetite for access to longer-term fund structures also links to the nature of transaction management across sub-Saharan Africa, given that managers are expanding their regional scope and are engaging in multi-jurisdictional deals. 

“There is a growing awareness that business assets in less sophisticated economies require longer holding periods to maximise returns to fund investors.”

Taking into account concerns about currency risk and global economic growth, van Lill added that the adoption of these innovative strategies, at a time when swings in global investor sentiment has inhibited fund raising for many fund managers, is proof of the resilience and adaptability of private equity and the ability of the asset class to respond and evolve to meet market and investor needs.

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