The amendments to Regulation 28 of the Pension Funds Act at the beginning of the year were warmly welcomed by local private equity players. As of January this year, investment limits on hedge funds and private assets had been split, and the allocation limit on private equity had been increased from 10% to 15%.

Regulation 28 applies to approved retirement funds, including pension, provident, preservation, and retirement annuity funds, and essentially limits asset managers' allocations of retirement savings to certain asset classes, including equities, property, and foreign assets.

Whether the higher limit on investments in private equity will have a material impact on how money managers view unlisted assets, or whether institution capital mandates will follow suit, remains to be seen. However, the regulatory change was one of the key themes that were discussed at this year’s Private Equity Conference – an annual event hosted by The Southern African Venture Capital and Private Equity Association (SAVCA). SAVCA is a non-profit industry association, representing 180 members in southern Africa, who collectively manage in excess of R205 billion in assets, and has launched a massive awareness campaign to educate, inform, and shift perceptions on the asset class in the local market.

On this point, one of the panellists at the conference, William Dlanga Nkutha, Deputy Principal Officer of the University of Cape Town Retirement Fund (UCTRF), stated that the latest regulatory developments have compelled allocators to learn more about the asset class. In his opinion, the increased limit has created flexibility for a greater degree of diversification and has piqued the interest of retirement funds to explore their options in unlisted markets. To this end, the UCTRF has committed to strongly considering private equity and infrastructure, particularly given the government’s objective to explicitly enable and reference longer-term infrastructure investment.

Another panellist, Suvira Bodha, Head of Alternatives and Portfolio Manager at Sanlam Investments: Multi-Manager said, that Regulation 28 had steered the trajectory of investments into private equity which have proven to be significantly impactful over the period they have been investing. “It is possible to deliver impact-related goals while placing equal importance on return-related goals. In today’s socio-economic climate, capital allocators are tasked with asking themselves how investments will make a difference in South Africa over time, as well as develop a sound business case for how investing in unlisted entities can boost much-needed infrastructural development,” she said.

In fact, Roy Havemann, CEO of Krutham (formerly known as Intellidex) said private equity played a pivotal role in bolstering public sector efforts to rejuvenate the country’s infrastructure. The most recent study, conducted by SAVCA in partnership with Krutham revealed that last year, 20% of PE investments went into infrastructure-related projects. This in turn enabled a substantial injection of funds into the communities behind these projects.

As he asserted: “PE fund managers are agents of social change. And, in light of the recent regulatory developments, if pension funds can unite behind Regulation 28 in a drive to supercharge local investment, there is no reason why South Africa cannot be the first country on the continent to reach developed status.”

But social impact and transformation aside, the latest concession might provide greater freedom of choice to investors and pensioners whose capital bases have either stagnated or eroded in a public market where Naspers rules supreme and new listings are few and far between. Pedestrian performance has also left the market wanting. Regulation 28, is also the rule that limits local investors' offshore allocations, and potentially enjoy better spoils across borders.

A few discussions were unpacked on the benefits of diversification benefits into private equity. But maximising the potential of this asset class; especially for first-time investors, involves chartering a path through several challenges presented by the current market, Savca stated in a press release.

Panellist Mardé van Wyk, Principal Consultant – Private Markets at 27Four, asserted, that fund managers need to apply their minds and expertise to “design solutions that reflect the level of sophistication needed to help investors mitigate the current volatility of the [public] market by leveraging the value of diversification into alternatives.

Janina Slawski, Head of Investments Consulting at Alexander Forbes, argued that collaborative efforts, such as a fund of funds, can grant higher levels of access for smaller pension funds to private markets. Unlisted markets represent an untapped opportunity for these funds to unlock the potential of private markets to produce returns, as well as meaningful impact.

While most panellists agreed that the turbulence of recent years contributed materially to the mooted performance of private equity in South Africa, several indicators suggest that more positive prospects lie ahead. Gergana Ivanova, the Associate Director in Strategy and Transactions at EY, said 2016 saw a declining trend of returns and the value of exits.

However, 2022 saw a substantial rise in deal exists both in number and value – a hugely positive and encouraging development. EY is SAVCA’s partner in bringing out the annual Private Equity Industry Survey.

The Survey results show that private equity firms continued to display much resilience as they navigated the tough environment, driving revenue and employment growth within portfolio companies, in a number of sectors. When inspecting the fundraising and investment landscape, the report stated that R19.6bn in funds were raised during 2022 – 21% higher than in 2021, despite a 13% fundraising decline globally.

When one goes down a layer, we see that this fundraising enabled 189 individual investments, a sizeable increase from 135 in 2021 and 169 in 2020, although still below the pre-Covid levels from 2016 to 2019. By sector, infrastructure (36.3%) and energy and related (16.7%) sectors attracted the largest portions of investment once again – up from 20.4% and 11.0% from 2021, respectively. Undrawn commitments present interesting opportunities for this dry powder to be deployed into the country’s much-needed infrastructure programme, the report said.

Despite the potential prospects, the private equity market in South Africa remains relatively small. As of 2023, it is estimated to have assets under management of around R150 billion. However, it is growing and industry players keep on doing so. Hopefully, Regulation 28 push in that direction will help, but only time will tell.

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