South African institutions are, on average, lacking significant commitment to alternative assets and private equity investments, with many funds having no exposure at all, says Old Mutual Alternative Investments.
However, since 2000, Old Mutual has steadily increased the percentage allocation of its total investment portfolio to alternative assets including private equity, infrastructure, impact investments and natural resources.
“In the late 1990s, we ventured into infrastructure because of the long-dated nature of the assets as well as the potential they had to provide above–average returns. We also saw the merit in investing in assets that had a positive economic spinoff – improving infrastructure should help boost GDP growth,” says Head of Old Mutual Alternative Investments, Paul Boynton, speaking at the South African Venture Capital and Private Equity Association (Savca) 2015 annual conference in Stellenbosch today.
“We later became a more active player in traditional leveraged buyouts and growth capital private equity, predicated on the belief that high investment returns would be achieved. More recently, we have been attracted to renewable energy projects, including wind, hydro and solar developments.”
“Though private equity is considered an illiquid asset class because of the length of time it takes to realise returns, the significant return premium is more than sufficient compensation. Old Mutual’s experience should encourage more funds to consider an allocation,” say Boynton.
Since 2000, Old Mutual has invested ZAR7-billion in private equity and infrastructure funds, and ZARR11-billion in direct deals in both private equity and infrastructure, an aggregate investment of R18-billion. Distributions received by Old Mutual on these investments since that date have amounted to ZAR18-billion while the remaining portfolio value is ZARR15-billion. Boynton says that their investment strategy has paid off having realised a profit of ZARR15-billion over the past 15 years from these two asset classes alone.
Old Mutual currently has a target allocation to alternative assets of 10% and an existing exposure which is just above this target. In comparison, Calpers, which is the largest US pension fund and one of the world’s largest private equity investors, has a target asset allocation of 10% to private equity and 1% to infrastructure. It has steadily increased its exposure to these assets and, since 1990, has invested approximately USD60-billion in private equity, had distributions back since that date of USD56-billion, with a remaining value of USD32-billion producing a profit of USD28-billion.
Over the past 10 years, Old Mutual’s investments in private equity and infrastructure have delivered an investment performance that has outperformed the overall portfolio by 3.4%, clearly adding value for investors. In comparison, Yale University’s endowment, which has had an extraordinary performance track record, has a current target allocation to private equity of 31% and a 10-year outperformance by private equity of the overall portfolio of 4.4%.
