With the International Monetary Fund predicting 0.8% GDP growth for South Africa in 2017, it is clear that there is a critical need to find an effective model outside of the public and listed company sectors to fund the projects required to stimulate growth.
According to Paul Boynton, CEO of Old Mutual Alternative Investments, one of the most underutilised opportunities to drive economic growth in South Africa is through the investment of private equity.
“The long-term and growth-focused nature of private equity investments, coupled with active stewardship, means that private equity can positively contribute to the real economy through job creation, transformation, sound governance practices and enterprise development,” says Boynton.
He adds that in addition to being uniquely positioned to address some of the material risks facing stable long-term economic growth in South Africa, private equity has consistently outperformed the listed equity market over a 10-year period, making a compelling case for its inclusion in a diversified, institutional portfolio.
“According to the latest RisCura-SAVCA South African Private Equity Performance Report, the 18.1% ten-year return from private equity outperformed the 12.6% delivered by the FTSE/JSE All Share Total Return Index (ALSI TRI) over the same period. Private equity also outperformed the FTSE/JSE Shareholder Weighted Total Return Index (SWIX TRI), which yielded 14.0% over the equivalent period,” says Boynton.
He points out that while South Africa continues to exhibit sluggish levels of growth, there are certain industries which are ripe with opportunity for private equity capital in 2017.
Boynton refers to the field of renewable energy as a prime example of one such industry. “After aging coal-fired power plants caused rolling blackouts, renewable energy as a source of electricity generation makes sense in terms of both pricing and practicality. After six rounds of bidding in the South African Renewable Energy Independent Power Producers (REIPP) Programme, 334 bids have been narrowed down to 102 preferred bidders – representing major opportunities for private equity investment. The IDEAS Managed Fund, managed by AIIM has been an active investor in this program and is invested in a portfolio of 20 projects.”
Boynton says that the agriculture sector is another example that offers great appeal to private equity investors. “Investments in land traditionally form an excellent inflation hedge, as produce price is directly linked to global markets providing a competitive running yield. Food is a defensive investment strategy as demand remains constant and is largely independent of financial market cycles. There has been strong growth displayed by certain crops over the past four years; namely Canola (33%), soft citrus (33%), and Lemons (22%).
“Macadamias are another crop which have seen exponential growth over time. While the production of macadamias in South Africa only really began in the early 1990’s, we are now the largest producer of macadamia nuts world-wide,” he adds.
Zoning in on the Western Cape, Boynton says that the film industry has been one of the fastest growing sectors, driven by a combination of visually appealing natural settings, highly competitive production costs and a well-developed skills base. “This industry not only generates employment whilst earning foreign exchange, but international broadcast content also promotes and showcases the country – ultimately having a positive impact on tourism. Through its long value chain, the sector has created more than 35 000 jobs in the province over the past three years and continues to contribute favourably to the economy.”
The last, but arguably most important area of opportunity for private equity investors in South Africa and the greater African region is infrastructure. “Although a relatively new asset class for many institutional investors, infrastructure investments are becoming an essential component of many investor portfolios. This is due largely to the fact that infrastructure generates predictable cash flows and competitive real returns over the long term, with relatively low levels of risk.”
Boynton says that the combination of the critical requirement for core infrastructure and the development of the private investment programmes is driving a strong pipeline of infrastructure opportunities, through which investors are able to generate strong risk-adjusted returns. “This proves the point that there doesn’t necessarily have to be a trade-off between impact investing and maximising returns.”