Selina Nalane, Client Director at Old Mutual Alternative Investments
Private markets are attracting greater attention as retirement funds consider how to diversify their portfolios and gain exposure to investment opportunities beyond listed markets. This includes infrastructure, private credit, private equity and growth capital, each with its own return drivers, risk profile and liquidity characteristics.
Like any investment, the risks associated with private markets need to be carefully understood. At the same time, retirement funds may also need to consider the implications of remaining underexposed to parts of the economy where a growing share of investment, innovation and infrastructure development is taking place.
South African retirement funds remain heavily concentrated in listed markets. While Regulation 28 allows allocations of up to 15% to private equity and significantly higher exposure to infrastructure, research estimates suggest that actual allocations to private capital remain below 2% for many funds.
That gap should prompt a serious conversation.
The discussion extends beyond the risks associated with private markets to the role the asset class could play in helping retirement funds meet their long-term obligations, particularly through exposure to energy, water, transport, digital infrastructure and growing businesses.
Large pension markets internationally have gradually increased their exposure to private markets. South Africa is earlier in that journey and can draw lessons from these markets without copying them blindly. Investment strategies need to reflect the liabilities, regulatory environment and economic needs of South African retirement funds.
South Africa requires long-term capital for electricity generation, transmission, water systems, logistics networks, affordable housing and growing businesses. These are not peripheral economic activities. They determine whether companies can operate efficiently, whether communities receive basic services and whether the economy can create jobs.
This broadens the way fiduciary risk may be considered. Retirement fund members need adequate savings at retirement, but they also need to retire into a functioning economy with reliable infrastructure, employment opportunities and sustainable public services.
An investment portfolio cannot solve every national challenge. It can, however, direct long-term capital towards assets that generate returns while strengthening the environment in which members will eventually retire.
Illiquidity remains a common objection to private-market allocations. Yet the debate often begins without first establishing how much liquidity a retirement fund genuinely requires.
For pension funds, maintaining sufficient liquidity to meet benefit payments and navigate periods of stress remains important. However, the long-term nature of pension fund liabilities can create scope for long-term assets, provided their liquidity characteristics are considered alongside expected cash-flow requirements.
Private markets are also far more varied than the label suggests. Private debt investments may return interest and capital throughout the life of a loan, while operational infrastructure assets can generate recurring distributions. Funds can also combine investments with different return, risk and liquidity characteristics.
The question is therefore not simply whether an asset is liquid or illiquid. It is whether its liquidity profile is understood, appropriately priced and aligned with the fund’s obligations.
Private-market structures can appear intimidating because they come with unfamiliar terminology, detailed agreements and extensive due-diligence requirements. Complexity, however, should not in itself be regarded as evidence of excessive risk.
Building confidence across the investment value chain could support greater engagement with private markets. Trustees and principal officers need to be equipped to assess proposals and consider how different strategies might fit within their portfolios, supported by greater transparency from managers.
The industry also needs stronger data, more transparent benchmarking and more published case studies. Investors are more likely to allocate when they can see how assets have performed, how risks were managed and how returns were generated.
Private-market adoption is unlikely to occur through a sudden industry-wide shift. It is more likely to develop as funds begin with appropriately sized allocations, build institutional knowledge, experience the cash-flow patterns and refine their strategies over time.
For South Africa’s retirement funds, any allocation to private markets should be considered on its merits, supported by sound analysis and aligned with members’ interests. This creates scope for a broader discussion about the role private markets could play in a retirement portfolio.
Ed’s note: For more on private markets, watch EBnet.Stream’s series Inside Private Markets, sponsored by Old Mutual Alternative Investments here.
ENDS
