RisCura - SAVCA South African Private Equity Performance Report
As at 31 December 2016
Table
of contents
01
02
03
04
05
Foreword
02
Market commentary
03
Private equity in South Africa
04
Methodology
05
Performance in South African Rands
06
06
07
08
09
10
Performance in US Dollars
07
Listed equity comparison (ZAR)
08
Distribution of fund performance by vintage year
09
How to use this report
10
About
11
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RisCura - SAVCA South African Private Equity Performance Report
Q4 2016
01. Foreword
May 2017
We are pleased to release the December 2016 edition of the
RisCura - SAVCA South African Private Equity Performance Report.
This report tracks the performance of a representative basket of
South African private equity funds and is published quarterly. The
purpose of the report is to provide stakeholders in South African
private equity with insight into industry returns, and to establish
and maintain an authoritative benchmark for the measurement of
private equity performance in this market. Since its inception in
September 2010, this report has become a vital component in the
marketing of the private equity industry. We would like to thank
SAVCA members for making their performance data available, and
for their commitment to this project.
Heleen Goussard
Executive: RisCura
Tanya van Lill
Chief Executive Officer: SAVCA
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RisCura - SAVCA South African Private Equity Performance Report
Q4 2016
02. Market
commentary
The last quarter of 2016 saw the South African economy contract,
with a negative GDP growth rate of -0,3% reported for Q4. The
negative growth rate was as a result of lower production levels in
the mining and manufacturing industries, with the agricultural,
forestry and fishing industries continuing the declining trend for
eight consecutive quarters.
Based on AVCA’s 2017 industry survey, South Africa remains the
top performing country across the continent for exits and value
creation. Deal-making in the current volatile economic and
political climate might prove challenging. However, due to strong
fundraising over the past two years, SAVCA expects good deal flow
trends to continue into 2017.
On the upside, the largest positive contributors in Q4 were trade,
catering & accommodation, finance, real estate and business
services. Household consumption expenditure increased by 2,2%,
which is to be expected during the festive season.
During 2016, the rand was at its strongest in Q4 with an average of
R13,86 to the US Dollar in December. The strengthening of the
rand was off the back of Donald Trump’s election as the 45th US
president and international markets’ uncertainty given Trump’s
position on economic policy.
In November 2016, The South African Reserve Bank (SARB) kept its
repo rate at 7% and its prime lending rate at 10,5% with the consumer
price index reaching 6,6% during this time. The unemployment
rate reached 27,1% in quarter 4, a 13-year high.
Tanya van Lill
Chief executive officer: SAVCA
Despite the South African economy being plagued by many
challenges, the private equity industry remains robust and continues
to outperform listed markets with the headline returns measure
(10-year ZAR IRR) of 15.8% as at December 2016.
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RisCura - SAVCA South African Private Equity Performance Report
Q4 2016
03. Private
equity
in South Africa
Private equity is an asset class which differs in nature from most
other assets, including listed equity. Typically, private equity fund
investments show low correlation to quoted equity markets and
are relatively illiquid, particularly in the early years.
Private equity will normally show a drop in net asset value before
showing any significant gains. This is often the effect of management
fees and start-up costs on the relatively small capital base of a new
fund. Private equity funds in South Africa typically follow a
commitment and draw-down model, which means that investors
commit a certain total of capital at the start of a fund, but are only
requested to transfer cash to the private equity manager as investments
are identified or costs are incurred. These funds typically return
capital during the course of the fund’s life as investments are
realised.
South African private equity offers institutional investors the
opportunity to invest in an asset class which has historically
outperformed listed equity over the long term. It does, however,
have a different nature from quoted equity and it is crucial that an
institutional investor considers the appropriateness of private
equity to its particular objectives.
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RisCura - SAVCA South African Private Equity Performance Report
Q4 2016
04. Methodology
Methods of measuring performance
The most widely accepted method for calculating returns of
private equity funds is the annualised internal rate of return (IRR)
achieved over a period of time. As a sense check to the IRR
measure, we also use the Times Money performance measure.
This report measures performance in two ways: by ‘since
inception’ and ‘end-to-end’ (over three, five and ten years). The
IRR calculated in this report is net of fees over all periods.
than older funds, the return will likely include a higher balance of
fees than a time period with more older funds. The longer term IRRs are
considered to be the most indicative of private equity performance
across different stages of the economic cycle, and are considered to
be the headline measures. Shorter term returns should be viewed
with caution as private equity is a long term investment. However,
shorter period returns may be indicative of the general performance
of private equity over this short period.
IRR Since inception
This is the most widely used IRR measure of private equity performance.
It measures the return of PE funds based on all cash flows in and
out of the fund, as well as the remaining net asset value of the
fund. This therefore most closely reflects the return an investor
would achieve if they invested at the start of the fund. This is the
most likely scenario in South Africa where investors in private
equity funds are locked in for the life of the fund, and must catch
up initial fees when joining a fund after the initial investors.
Times Money
Times Money is the ratio of total capital invested to total capital
returned and remaining value. This is a useful cross-check of IRR
measures, and is easily understandable. While IRR calculations are
heavily dependent on the length of time that capital has been
invested, Times Money does not take time into account. A Times
Money in excess of 1 means that value has been created for the
investor.
End-to-end IRR
End-to-end IRRs allow the computation of the return of groups of
private equity funds which do not necessarily have the same
inception date. This calculation also allows a better comparison of
private equity returns to those of other asset classes over similar
periods. While this method has advantages, it must be noted that
it allows the returns of funds at different life cycle stages to be
combined. Where the period selected contains more new funds
Public market equivalent (PME)
This measure seeks to equate the heavily timing-dependent returns
of private equity funds with the returns of public market indices.
The measure is a ratio of the net outflows from PE funds re-invested
into the public index to the end of the fund’s life, divided by the
inflows into a PE fund invested in the public index until the end of
the fund’s life. A ratio of above 1 reflects outperformance of private
equity, while a ratio under 1 reflects under performance.
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RisCura - SAVCA South African Private Equity Performance Report
Q4 2016
05. Performance in South African Rands
Pooled IRR by time period
Pooled IRR by fund size
Pooled IRR by vintage year
50%
40%
20%
36.3%
15%
15.8%
14.8%
16.1%
30%
40%
32.5%
44.9%
30%
10%
20%
20.9%
20%
18.6%
5%
10%
0%
0%
10.9%
16.9%
10%
10.6%
5.9%
10 year
5 year
3 year
Times Money by time period
3.0
1.8
0.70
0.77
1.2
2.0
2.22
0.67
0.43
0.2
0.5
0.50
0.0
0.0
10 year
Realised Times Money
5 year
3 year
Unrealised Times Money
1.27
1.34
1.0
0.53
Pre 2000
0.71
0.62
1.48
1.5
0.4
0.49
1.5
0.99
0.6
2.0
2.72
0.77
1.0
0.8
0.00
Over R1bn
Times Money by fund size
0.02
2.5
Between
R500m and R1bn
Pooled IRR
Times Money by vintage year
2.0
1.4
Under R500m
2000-2004 2005-2006 2007-2008 2010-2012 2013-2015
Pooled IRR
Pooled IRR
1.6
0%
Pre 2000
1.0
0.88
0.84
0.27
0.32
2000-2004 2005-2006 2007-2008 2010-2012 2013-2015
Realised Times Money
Unrealised Times Money
1.12
1.06
Between
R500m and R1bn
Over R1bn
0.5
0
Under R500m
Realised Times Money
Unrealised Times Money
*Fund Size is reflected as committed capital in South African Rands.
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RisCura - SAVCA South African Private Equity Performance Report
Q4 2016
06. Performance in US Dollars
40%
40%
12%
10%
Pooled IRR by fund size
Pooled IRR by vintage year
Pooled IRR by time period
38.7%
10.7%
34.7%
30%
30%
28.3%
8%
20%
6%
20%
6.5%
10%
4%
3.4%
0%
5 year
-3.9%
Pre 2000
3 year
Times Money by time period
0.53
0.95
2.0
Times Money by fund size
0.00
2.59
1.5
1.5
0.56
1.04
0.47
0.76
0.67
0.5
0.39
0.0
0.0
10 year
Realised Times Money
5 year
3 year
Unrealised Times Money
Pre 2000
0.23
0.79
0.29
2000-2004 2005-2006 2007-2008 2010-2012 2013-2015
Realised Times Money
0.39
0.39
1.01
1.04
1.0
0.25
1.0
0.2
0.26
1.51
1.99
0.6
Over R1bn
0.01
2.5
0.63
Between
R500m and R1bn
2.0
3.0
0.45
0.4
Under R500m
Pooled IRR
Times Money by vintage year
1.4
1.0
0%
2000-2004 2005-2006 2007-2008 2010-2012 2013-2015
Pooled IRR
Pooled IRR
12.8%
10%
9.6%
-10%
10 year
0.8
2.5%
0%
2%
1.2
4.9%
14.1%
Unrealised Times Money
0.5
0
Over R1bn
Between
R500m and R1bn
Realised Times Money
Unrealised Times Money
Less than R500m
*Fund Size is reflected as committed capital in South African Rands.
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RisCura - SAVCA South African Private Equity Performance Report
Q4 2016
07. Listed equity comparison (ZAR)
Performance compared to listed equity markets
CAGR
1.3
Pooled IRR
ALSI TRI*
FINDI TRI*
SWIX TRI*
2006Q4 - 2016Q4
15.8%
10.5%
14.4%
11.4%
2011Q4 - 2016Q4
14.8%
13.0%
19.9%
14.2%
2013Q4 - 2016Q4
16.1%
6.2%
9.0%
7.6%
1.2
PME
Time period
1.1
1.0
0.9
*Listed index returns are before fees.
0.8
2007 - 2008
ALSI
Direct Alpha
2013 - 2014
2015 - 2016
SWIX
1.20
8%
1.15
8.2%
6%
6.7%
5.5%
4%
0%
2011 - 2012
Public market equivalent results by time period
10%
2%
FINDI
2009 - 2010
4.1%
0.0%
1.11
1.05
1.1%
3.2%
1.00
0.0%
1.16
1.15
1.10
1.11
1.01
0.99
1.13
0.98
0.95
-2%
0.90
-4.8%
-4%
-6%
5 year
10 year
FINDI
ALSI
SWIX
0.84
0.85
3 year
0.80
5 year
10 year
FINDI
ALSI
3 year
SWIX
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RisCura - SAVCA South African Private Equity Performance Report
Q4 2016
08. Distribution of fund performance
by vintage year
Distribution of fund performance
Distribution of fund performance
30%
30%
25%
25%
20%
20%
15%
25.8%
15%
15.1%
10%
10%
9.8%
9.8%
7.8%
5%
0%
5%
6.4%
0%
2005-2008
75th percentile
Median
2010-2015
25th percentile
75th percentile
Median
25th percentile
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RisCura - SAVCA South African Private Equity Performance Report
09. How
Q4 2016
to use this report
Useful information:
Definitions:
Returns of cash flow and portfolio value data from private equity managers
are the primary source for information included in this Report.
CAGR is the compound annual growth rate.
The IRR performance calculation solves for the discount rate that makes
the Net Present Value of a set of cash flows equal to zero. The calculation
is based on cash-on-cash returns over equal periods, modified for the
residual value of the fund's equity (NAV). The residual value attributed to
each respective group being measured is incorporated as its ending
value.
Committed capital is the value of dedicated investment funds
pledged by the investors of a private equity fund and available for
investment. This is a proxy for the size of the fund.
Fund Size is determined by the committed capital of a fund.
The database accounts for cash flows on a daily basis wherever possible
otherwise a monthly basis, and NAVs on a quarterly basis.
IRRs are money-weighted returns that should be compared to
time-weighted returns with caution. Time-weighted returns are
used to measure returns in most asset classes where frequent
valuations are available.
The End-to-End performance calculation is similar to the since inception
IRR, however, it is measuring the return between two points in time. The
calculation takes into account the opening NAV, the in-period cash flows
and the closing NAV. Returns are then annualised for comparability.
PME Public Market Equivalent is a measure that determines
whether private equity returns have exceeded or underperformed a
public market. A PME score of more than one indicates outperformance
of private equity.
The pool of funds has been split into subsets where this would enhance
the user’s understanding of returns. However, this has been balanced
with confidentiality considerations, and no such subsets include fewer
than four funds.
Pooled IRR aggregates or "pools" all cash flows and ending NAVs
to calculate a money-weighted return.
Most funds included in this Report have unrealised investments, and
therefore rely on the valuation of these investments to determine
returns. All participating fund managers are members of SAVCA and
apply the International Private Equity and Venture Capital Valuation
Guidelines to determine these valuations. RisCura has not verified that
these Guidelines have been adhered to.
Only South African Rand denominated funds have been included in this
Report, and therefore none of the returns included are affected by
exchange rate movements.
Realised Times Money is the ratio of cash returned to investors
divided by total cash invested.
Total Times Money is the sum of the Realised and Unrealised
Times Money.
Unrealised Times Money is the ratio of the carrying value of
portfolio investments not yet returned to investors divided by
total cash invested.
Vintage Year is defined as the year in which a fund first draws
down capital from its investors.
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RisCura - SAVCA South African Private Equity Performance Report
Q4 2016
10. About
About RisCura
About SAVCA
RisCura is a global, independent provider of professional investment
services. RisCura services institutional investors, asset managers, hedge
funds and private equity firms with over USD200 billion in assets under
advice. RisCura is a leading provider of investment consulting, independent
valuation, risk and performance analysis services to investors.
The Southern African Venture Capital and Private Equity Association
(SAVCA) is the industry body and public policy advocate for private equity
and venture capital in Southern Africa, representing about R170 billion in
assets under management, through 160 members. SAVCA promotes
Southern Africa private equity by engaging with regulators and legislators on a range of matters affecting the industry, providing relevant and
insightful research on aspects of the industry, offering training on private
equity and creating meaningful networking opportunities for industry
players.
For more information about RisCura visit www.riscura.com
For more information visit www.savca.co.za
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