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SA pension funds miss out on PE opportunity

Africa Global Funds
April 19, 2016, midnight
228

Word count: 607

The allocation by pension funds in Southern Africa to private equity remains limited, according to the findings of a recently released survey report by the Southern African Venture Capital and Private Equity Association (SAVCA).

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The allocation by pension funds in Southern Africa to private equity remains limited, according to the findings of a recently released survey report by the Southern African Venture Capital and Private Equity Association (SAVCA).

The report titled New Frontiers, has established that 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.

Erika van der Merwe, CEO of SAVCA, said that respondents to the survey cite a lack of familiarity with the private equity asset class as one of the primary reasons for not investing in it.

“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 said.

“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,” she added.

The SAVCA New Frontiers 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 said.

“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,” she said.

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 R5bn of assets under management, 30% have between R5bn and R35bn 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,” said Van der Merwe.

“The distinct challenge to the private equity industry is to step up the quality of its communication and interaction with the pensions industry. This is something we will be focusing on in 2016 and beyond,” she added.

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