Asset managers miss out on private equity returns — Old Mutual unit

Asset managers should consider allocating more capital to unlisted assets to diversify their investments and boost returns for underlying investors, said Old Mutual Private Equity.

Investors continue to underallocate capital to unlisted assets with less than 2% of their assets under management (AUM) typically being invested in unlisted asset classes such as private equity, said Farhad Khan, a partner at Old Mutual Private Equity, a division of Old Mutual Alternative Investments.

That is despite Regulation 28 of SA’s pension funds act allowing for allocations of as much as 15% of AUM and global trends that have seen offshore fund managers allocate up to 20% of their AUM to private market assets, said Khan.

“In the old days alternative assets would have included hedge funds but what I’m talking about is private equity, infrastructure, property and hard assets that are not traded on public markets,” Khan told Business Day.

He said there is clear empirical evidence that private equity outperforms listed equity markets over time. In particular, he cites the US where data shows that alternative investments outperform listed equity markets by 3%-5% over the long term.

Old Mutual Private Equity is primarily focused on investments in the mid-market segment of the private equity industry, which typically targets private companies with operating profits of about R100m or more.

Khan said Old Mutual Private Equity’s Fund V, which is targeting a R5bn capital raise, can invest up to 25% of its capital base in businesses in the rest of Africa, with a focus on East Africa.

“We’ve intentionally singled out East Africa and perhaps a bit of West Africa, being Ghana and elsewhere as potentially where we may go,” he says. “But by and large we’re very much focused on SA.”

‘CONSUMER SLANT’

Khan said that while Old Mutual Private Equity has “a slight consumer slant” it will consider investments in any business with a solid track record and good management team that is not property or infrastructure based. Some of the sectors it has looked at recently include manufacturing, education and the medical industry.

While Khan said local asset managers should be upping their allocation to private market funds he does caution that their investment horizon needs to be on the lengthy side.

“Illiquidity is the thing that people grapple with most in private equity. Typically, if someone makes an investment into a private equity fund they have a 10year investment horizon.

“However, the illiquidity does provide the benefit of outsize uncorrelated returns as well as diversification benefits to a portfolio,” he says.