The plus points of PE

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FINANCIAL MAIL
28 SEP 2017

As alternative assets go, private equity (PE) is proving a lot more successful than hedge funds.  

With more than R170bn under management, PE has more than double the asset base of hedge funds. Yet, if anything, the news flow about private equity has been worse. Think of the notoriety of Bain Capital’s disastrous investment into Edcon.

Though it wasn’t technically private equity, the purchase of New Look by Brait’s old PE hands doesn’t look much better. So when Rand Merchant Investment Investment Managers (RMI IM) decided to diversity it had to be selective. There is nothing like keeping it in the family: Ethos was spun out of FNB’s FirstCorp unit and for many years RMB held a hefty stake of its equity before it became fully independent. Under Stuart MacKenzie, Ethos is re-establishing ties with the greater RMB group.
While it can get the support of new shareholder RMI, it hasn’t had to join the FirstRand Group itself, with all the accompanying bureaucracy. The best news for Ethos is that it acquires a credible BEE partner as Royal Investment Managers (ultimately controlled by Royal Bafokeng) is taking a 10% share, pushing Ethos’s BEE shareholding to 25%, RMI IM is taking 20%.

It’s not hard to see why Chris Meyer at RMI has taken the stake. Though these words might come back to haunt me one day, after years of dealing with Ethos I am confident it is a highly capable, highly ethical business. It is a true asset-management aristocrat, which is not how I would describe the younger and scrappier businesses in the RMI portfolio. Ethos has rarely gone down the stereotypical private equity route of loading on debt. It focuses on growth investments, which can’t always support a strained balance sheet.

Meyer has quite a full roster of traditional managers. And it is not easy to back a start-up in private equity as the payback would only be seven to 10 years down the line. Ethos has three irons in the fire: it’s classic Ethos Fund 6; its midmarket fund, run by BEE icon Sonja Sebotsa; and a mezzanine fund run by a team which recently left Stanlib.

MacKenzie says there is more deal flow than PE capital, and with RMI’s help it aims to build a platform in which managers can bring their funds. Ethos would do the back-office functions in a full “plug and play” model. We could finally see private equity funds open up to the retail market. MMI, already RMI’s distribution partner, has experience of the asset class through the Momentum PE fund of funds, and it operates successfully in the affluent market.

Long-term, big-money deal

Realistically PE will never be a mass-market product, as it involves making a seven- to 10-year commitment, and probably handling over at least R100 000. It certainly doesn’t lend itself to recurring premium payments.

But PE is very suitable for pension funds, which have indefinite terms and can simply reassign the units in the PE fund when a member resigns or retires. In fact almost 80% of local investments in private equity is from pension funds. The rest is made up of private equity funds of funds and private individuals.

Life would be tougher for the fundraisers without foreign investment. Much of this is made up by governments, aid agencies and development finance institutions – though proportionately they make up a much bigger share of the rest of Africa investments. Foreign pension and endowment funds are also meaningful contributors to SA private equity, as are, more modestly, private equity funds of funds.