South African private equity returns continue to edge higher, maintaining outperformance relative to the listed equity market, the latest RisCura-SAVCA South African Private Equity Performance Report has revealed.

By mid-year 2015, the South African private equity industry delivered a ten-year internal rate of return (IRR) of 21.7%, up from 20.5% in March 2015 and 19.1% as at December 2014 (returns are rand-based and are net of fees and expenses).

This performance compares with the 17.1% return from the FTSE/JSE All Share Total Return Index (ALSI) over the equivalent ten-year period.

Erika van der Merwe, CEO of the Southern African Venture Capital and Private Equity Association (SAVCA), said that the healthy and steady returns performance from private equity is notable in the context of global and local investment uncertainty and volatility.

“Institutional investors remain on the lookout for reliable sources of long-term yield; moreover, there is growing awareness of the importance of finding suitable platforms to achieve portfolio diversification as a hedge against risk and uncertainty,” she said.

Over this period, private equity outperformed other key JSE equity returns, too; the Shareholder Weighted Total Return Index (SWIX) yielded 18.1% and the Financial and Industrial Index (FINDI), returned 21%.

Over a five-year period, the returns from private equity have continued to improve, rising to 18.5% annualized as at June 2015, up from 17.0% in March 2015 and 17.71% as at December 2014.

This five-year private equity performance compares favorably with measurements for the ALSI (17.7%), but comes in marginally below the SWIX (19.5%), with the FINDI performing at 27%.

The private equity performance over a three-year horizon is now at 16.4% annualized, up from 15.0% in March 2015 and 14.1% as at December 2014.

Over a three-year period to June 2015, comparative returns for South African listed indices were 19% for the ALSI, 20.6% for the SWIX, and 29.2% for the FINDI.

Van der Merwe said that the absolute increased performance in private equity over the last few quarters is owing to distributions (the return of capital to investors into funds) outweighing draw downs (calls on the committed capital of the investor, required for specific investments).

“This trend of a net return of capital to investors has been evident over the past year, and is reflective of many funds reaching the end of their ten-year life. It also coincides with ideal market conditions for realizations – the sale of underlying assets held in a fund – at attractive market prices,” she said.

According to Rory Ord, Executive at RisCura, prospects for private equity investments remain relatively positive.

“Private equity is a long-term asset class; investments by the industry will benefit from the return to global trend growth over the medium term, as well as from any commodity recovery, which in turn would result in the rand stabilizing and in domestic economic growth recovering,” he said.

“Additionally, listed equity markets are currently highly priced and investors are reducing their return expectations. Conditions in listed markets are therefore improving the relative case for private equity to offer superior returns,” he added.