ASHBURTON INVESTMENTS: Expert Opinions: Edition: April / June 2019


Search for yield in private markets

Isabella Mnisi, the Ashburton Investments chief investment officer for private markets,
discusses how SA lags when it shouldn’t. Take a close look at where potential
advantage lies for the investor and for the country.

Increasing concerns around the global economy — the United States/China trade conflict, uncertainty around Brexit and emerging-market risks — are pushing investors to look for other sources of return. Global growth also seems to have peaked, creating downside risk.

On the domestic front, constrained economic growth projections (albeit in the right direction) – as well as disappointing stock market performance, lack of business confidence and political uncertainty — are leading investors to look for other sources of return. The market is also not expected to improve substantially in the short term.

Therefore, international factors coupled with local factors have led investors to start looking beyond traditional assets for other sources of returns. Alternative markets still provide attractive valuations and offer the potential for alpha while also offering diversification benefits to traditional assets.

However, SA institutional investors allocate only about 2% of their assets to alternatives. This is extremely low when compared to the developed world (US and Europe) where allocations are generally over 20%.

Below we look at the different alternative-investment options available. Please note that the industry data on alternative assets is not as readily available because this market is not as developed and standardised as for traditional assets.


Unlisted credit

In SA, more than 80% of companies fund themselves through the banking system (private markets). This means that fewer than 20% of companies use the public-debt capital markets for their funding requirements.

More developed countries have many more companies accessing the debt-capital markets for their debt funding; for example, the US represents the opposite of the SA scenario. The SA phenomenon has resulted in banks having very well-diversified balance sheet portfolios, whereas capital-market investors only have access to limited investment opportunities through the debt-capital markets.

Unlisted credit offerings give investors the opportunity to access diversified pools of assets that are currently not readily available to investors in funds regulated as collective investment schemes.

Yet, in the past few years, we have seen increased interest and demand for unlisted credit from SA institutional investors. Regulation 28 allows for 15% of a pension fund’s assets to be invested in unlisted debt instruments. Most pension funds are below this limit.

Private equity

Southern Africa’s private equity industry had R158,6bn funds under management as at December 2017. Of funds raised during 2017, 49,9% were from SA sources according to the Southern Africa Venture Capital & Private Equity Association (SAVCA) 2018 Private Equity Industry Survey.

SA institutional investors have been increasing their participation in the private equity market for many years, as can be seen from the above chart. Investors may include mezzanine debt under the private-equity category depending on the way in which the instrument is structured.

Real assets

Mnisi . . . strengthen alternatives

Investor participation in real assets will either be through a debt or equity structure. Institutional investor participation in real assets is key, especially for a country like SA with huge infrastructure funding needs.

Real assets offer a great source of inflation hedge for long-term liabilities, particularly for pension funds. These real assets’ long duration, predictable cash flow and inherent inflation hedge characteristics are also highly attractive.

Investors have previously participated in toll road and renewable energy infrastructure funding. Some have preferred to participate in the post-construction phase of the transaction due to it being more de-risked. This is mainly because of a lack of understanding of the construction risk phase.

Policy and pricing uncertainty, due to political meddling, have seen investors scaling back from these assets in the SA market. But energy minister Jeff Radebe has moved swiftly to provide some certainty on the funding of renewable energy projects.

We hope that this will lead to increased confidence and funding from institutional investors. Our country’s fiscal constraints will require institutional investors to plug the infrastructure-funding gap.

Be meaningful

We believe that any portfolio asset allocation needs to have a meaningful allocation to alternative assets. Alternative investments, when used as part of a multi-asset portfolio to complement traditional investments, can lead to improved long-term risk-adjusted returns.

First-time investors in the alternative markets should focus on the overall benefits that alternative investments could bring to a portfolio.