Emile Hugo of Motswedi Economic Transformation Specialists and Independent Principal Officer

In today’s uncertain South African economic environment – characterised by Rand volatility, structural unemployment, high interest rates, energy transition pressures, and turbulent public markets – the traditional 60/40 balanced portfolio is under strain. Correlations between local equities and bonds have risen sharply during recent shocks, increasing risk exposure for retirement funds, institutions, and high-net-worth investors.

Private markets (PM) offer a powerful complement, rather than a replacement, to the classic 60/40 approach. By allocating up to the limits now allowed under Regulation 28 for unlisted investments, investors can improve risk-adjusted returns, generate steady income, protect against inflation, and achieve genuine diversification. South Africa’s private markets are substantial, with local private equity assets under management exceeding R200 billion and Southern African PE firms managing R233 billion as of end-2024 (SAVCA data). These markets unlock opportunities simply unavailable in public equities and bonds.

The most effective results come from a thoughtfully constructed multi-asset private markets allocation that combines private equity (PE) for growth and transformation, private credit for yield and downside protection, and infrastructure for stability and inflation hedging.

Why each asset class belongs

Private Equity drives company transformation through buyouts, growth capital, expansion deals, and B-BBEE-aligned investments that support job creation and economic empowerment. Deal values surged 69% in 2024 to R26.6 billion across 228 transactions, with infrastructure and energy sectors leading at 27% and 13% of value respectively. Portfolio companies have historically delivered strong revenue and EBITDA growth. However, PE’s J-curve effect and illiquidity make it essential to pair it with more defensive strategies.

Private Credit has expanded rapidly as banks pull back due to regulatory and capital constraints. The alternative lending market is projected to reach USD 2 billion by 2029, implying 14% annualised growth. Strategies such as direct lending, mezzanine, asset-based lending, and infrastructure debt deliver attractive floating ZAR yields (often JIBAR + 400–600 bps or more) with historically low default rates. Seniority in the capital structure and disciplined underwriting provide equity-like returns with more credit-like risk. Notably, 86% of local PE firms are now considering or actively building private credit strategies (SAVCA).

Infrastructure focuses on essential assets including renewable energy, toll roads, ports, data centres, water, and logistics. Core infrastructure offers predictable, often CPI-linked cash flows, attractive real returns, and low volatility. It has performed well amid South Africa’s energy transition and chronic infrastructure backlog, making it a natural fit for Regulation 28 portfolios.

The power of combination

Blending these asset classes creates low inter-correlations that are difficult to replicate in public markets. Private infrastructure shows minimal linkage to the ALSI, private credit frequently exhibits negative correlation to traditional bonds, and PE/infrastructure pairings remain subdued – in contrast to public-market correlations that have recently exceeded 0.8 during stress periods.

Adapted global back-tests show that adding a moderate-risk private markets sleeve of up to 15% to a traditional 60/40 portfolio (for example: 45% PE, 25% Private Credit, 30% Infrastructure) can enhance outcomes. Historically, this has delivered higher annualised returns, lower drawdowns during local shocks (such as ZAR weakness or load-shedding), reduced volatility, and lower equity beta.

The private markets triad: Income, growth, resilience

A diversified multi-asset private markets allocation complements the 60/40 portfolio by providing:

– Stable quarterly income from private credit and infrastructure distributions;

– Capital appreciation through PE value creation and infrastructure asset growth;

– Strong inflation hedging via CPI- or JIBAR-linked contracts and floating-rate credit;

– Downside protection from credit seniority during JSE or Rand turbulence.

Real-world portfolio construction

Recent Regulation 28 amendments, combined with local multi-manager platforms, have made this approach far more accessible. These vehicles offer professional manager selection, B-BBEE compliance, and shorter capital lock-ups than traditional closed-end funds. A typical moderate-risk allocation for institutions or high-net-worth investors follows a similar blended structure, delivering institutional-quality diversification within permitted unlisted limits.

Risks are real, but manageable

Illiquidity remains the primary concern for many investors. Manager selection is critical, as top-quartile performers significantly outperform bottom-quartile funds. Valuation smoothing can obscure short-term volatility, while currency and execution risks arise with broader African exposure.

These risks can be mitigated by diversifying across vintages, geographies (Southern Africa as a hub with selective opportunities elsewhere), sectors (renewables, healthcare, fintech), and multiple managers through local fund-of-funds or multi-strategy vehicles. Strong ESG and B-BBEE integration further enhances long-term performance and impact.

Portfolio resilience and sustainable development

A well-constructed private markets allocation helps future-proof South African investors’ portfolios. By combining infrastructure reliability, private credit yield, and private equity upside, investors can achieve higher returns, lower volatility, effective CPI hedging, and true diversification.

Beyond financial benefits, these investments deliver meaningful social impact. Private equity supports job creation, skills development, and B-BBEE through transformative transactions. Infrastructure projects expand renewable energy access, improve logistics and water systems, and enhance digital connectivity – improving quality of life for millions. Private credit backs SMEs and underserved sectors, fostering entrepreneurship in townships and rural areas.

South African institutions have long recognised this combination of attractive risk-adjusted returns and developmental impact. With Regulation 28 liberalisation and growing local product innovation, retirement funds, high-net-worth individuals, and smaller institutions can now access these advantages.

In South African private markets, diversification within a balanced portfolio is not merely about spreading risk – it is about building more resilient, impactful, and inclusive long-term growth.

ENDS

Ed’s note: For more, catch EBnet’s latest podcast series, Inside Private Markets, here.