Navin Lala, Client Director at Old Mutual Alternative Investments
The fundamental needs of investors have always been anchored around maximising returns while managing risk. Market cycles and opportunities may wax and wane due to economic, technological and geopolitical shifts, but the underlying objectives of investors seldom change.
Investors are always in pursuit of finding attractive return opportunities and adapting to new ways of accessing returns in the most efficient manner. In a similar manner in which the inclusion of passive investments has reduced portfolio costs, alternative investments or private markets have many important characteristics that improve portfolio effectiveness from a return and risk perspective.
In private markets we find several important characteristics that improve portfolio efficiency from both a return and risk perspective. From a return perspective private markets provide investors with access to returns from high growth companies and industries that may not be accessible in the traditional listed markets like the Johannesburg Stock Exchange (JSE). Infrastructure is a case in point where opportunities in this secular mega trend reside outside of the domestic listed market.
Similarly, from a risk perspective, private market assets have lower correlations to traditional stocks and bonds, as well as the benefit of valuations being a function of the economic performance of the underlying assets and not subject to the asset price volatility of traditional listed assets where changes in market sentiment can leave listed assets in positions of material over or under valuation that can last for extended periods of time.
Globally investor portfolios have evolved from a traditional 60/40 blend of stocks and bonds to a roughly 40/30/30 blend of stocks, bonds and alternative investments. Investors have experienced the benefits of alternative investments which in part has led to the global alternative investments industry growing from an industry with assets under management of US$4 trillion in 2010 to over US$20 trillion today.
Another key factor driving the growth in private markets is that companies are staying private for longer. Many companies choose to stay private as they believe that it allows them to maintain their pro-growth entrepreneurial mindset, allowing them to be nimble and adaptive to changes while remaining single mindedly focussed on executing the companies long term strategy and objectives. Further being a listed company can be expensive and onerous.
To get a sense of the scale of the opportunities in private markets, the investable private universe is an order of magnitude larger than the listed markets. Globally there are about 10,000 public companies with revenues greater than US$100m, compared to roughly 95,000 private companies that are of similar sizes in revenue. To put this into context, out of the total investable universe (105,000 public and private companies), investing in the listed market only, means that investors would be ignoring more than 90% of their investment opportunity set.
The larger investment opportunity set means more investment choice and importantly significantly increases the odds of finding quality businesses at sensible entry points, then growing them through active ownership rather than waiting for them to become listed and hoping the market later awards it a higher valuation.
The returns in the private markets show up not just in the portfolio, but in the real world as well. For instance, our track record reflects this advantage. The IDEAS Managed Fund, our flagship infrastructure equity portfolio launched in 1999, has delivered roughly CPI plus 10% over the life of the fund while growing the much needed infrastructure capacity required to grow the South African economy and drive job creation.
Our Private Equity Fund V has delivered 40.6% since inception (2020) with most fund assets already being exited, realising returns for investors. The Hybrid Capital Fund I, our private debt strategy focused on the missing middle of the capital stack, has run at 15.6% since inception (2021) while providing the much needed expansionary capital to fund growth. Globally, our International Private Equity Fund of Funds III stands at a net US Dollar return of 17.2% since inception (2017) versus the 9.8% MSCI ACWI return.
These returns translate into real capacity. Across our platforms we count 40,000+ telecom towers and 293,000 active fibre connections. We have contributed to over 1,300 km of tarred toll roads, more than 3 GW of installed renewables and over 50 schools serving 30,000+ learners.
As outlined above, ownership is active, not observational. We see monthly accounts, sit on boards and work with management on the levers that drive value such as pricing discipline, procurement, route-to-market, working-capital and governance. Course corrections happen earlier. When plans work, compounding starts sooner and translates into enterprise value. The same proximity applies to our lending strategies.
On the credit side protections are covenant-heavy and interventions are practical. When performance drifts, lenders engage quickly and remedial actions follow a well-worn playbook. This is why our hybrid capital capability has gained traction.
Private markets are also a better way to have a real stake in South Africa. It is estimated that almost 60% of the earnings from JSE listed companies are derived from offshore sources. Private markets provide investors access to opportunities that back the businesses that power South Africa’s daily life logistics platforms, renewable power, data networks, healthcare, housing and education. Domestic demand for these services is rising and the operational improvements we drive show up in margins and distributions. It is return with relevance.
Alternative investing in South Africa is not a niche anymore. Just like the way investor portfolios evolved from investing in railroads in the 1800s, consumer electronics in the 1980s and the internet in the 2000s which transformed information flow, commerce and communication, they are now shifting allocations from a 60/40 portfolio of purely active strategies to a blend of active, passive and private market alternatives.
It is where new capacity gets built, where operational improvement is unlocked and where investors are being paid for providing patient, problem-solving capital. The opportunity is large, the pipelines are visible and the results are measurable in both performance and impact.
ENDS
To read our legal notice and disclaimer, please visit: https://www.oldmutualalternatives.com/legal/
