Private equity returns in South Africa measured over a rolling 10-year, five-year and three-year period took a dip last quarter returning 18.2% over 10 years compared to the previous quarter’s 23.1%. Returns over five years were down to 13.9% compared to the previous quarter’s 20%. Only the three-year returns were up slightly from 17% in December 2011 to 19% at the end of March 2012.
Measured by Riscura Fundamentals using an internal rate of return, the figures are based on rolling time periods. Commenting on the dip in returns, Rory Ord, head of Riscura Fundamentals, says: “The headline 10-, five- and three-year end-to-end internal rate of return calculations are reliant not only on the cash flows in the period but on the opening net asset values at the beginning of each reporting period and the closing net asset values at the end of the reporting period.”
One of the biggest factors contributing to the dip in the longer-term returns this quarter is the rise in the value of the opening net asset values (NAVs) compared to the prior quarter. As an example, for the 10-year period the NAVs reported in March 2002 were higher than the December 2001 NAVs, resulting in a lower return in the latest 10-year period.
In real terms, however, the private equity market in South Africa has been undergoing somewhat of a revival over the past nine months, with cashflow movements doubling compared to the previous nine months. From June 2011 to March 2012, inflows doubled to R1.5 billion while outflows also doubled to a higher level of R5 billion mostly due to a couple of significant market exits including the R2 billion exit of Life Healthcare by Old Mutual Private Equity in the third quarter of 2011.
Commenting on the cash flows, Ord says: “During the 2009 and 2010 period we saw hardly any cash flows going in and out of the industry, it was a very quiet period. That goes along with what people were saying at the time, which was that there was a big expectation gap between buyers and sellers. The sellers were thinking of the prices that were in the market pre-2008 and the buyers wanted to pick up quite heavily discounted companies. It appears that over the last year or so that gap has narrowed to the extent that deals are actually happening now.”
When compared to the public markets, private equity lags the FTSE/JSE All Share Index (ALSI) returning 19% compared to a return of 20% for the index over three years. It is also outperformed by the FTSE/JSE Financial Index (FINDI), which returned 28.2% over the same period, driven mostly by the significant run in banking shares that took place after the global financial crises. When compared to its true measure of 10 years, suited to private equity’s nature as a long-term investment, the asset class holds up well beating all public markets with a return of 18.2% compared to the ALSI’s 13.5%, the FINDI’s 17% and a 16.9% return for the SWIX. Copyright. HedgeNews Africa – July 2012.
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