- Alexander Forbes says smaller pension funds are enquiring about allocating more of their members' money in alternative assets such as infrastructure and private equity.
- Big insurance companies are also playing catch-up, launching new alternative investment funds that can create huge social benefits and deliver returns at the same time.
- Alexander Forbes says these asset classes are falling more in favour with investors because they've done better in generating inflation-beating returns relative to listed markets.
South African pension funds and asset managers are starting to see benefits of investing in private equity and infrastructure and more are enquiring about increasing the money they put into these asset classes, Alexander Forbes said on Tuesday.
The country's largest pension funds administrator said during a discussion on economic outlook and investment trends that - while things such as funds focused on infrastructure and the financing of small and medium business (SMEs) used to be the forte of bigger pension funds in the past - many of the smaller funds that the company administers are showing more interest in the private market space.
The increased interest comes as the pool of investable listed companies is on a constant decline in South Africa due to companies delisting from the JSE.
But Lebo Thubisi, head of manager research at Alexander Forbes, said these alternative assets – alternatives to investing in listed shares – are also falling more in favour with investors because they've done better in generating inflation-beating returns.
"As an organisation, in the last four years we have seen the real benefit of having private markets as a feature in our portfolios. From a performance perspective, relative to listed markets, private markets have proven their ability to give those inflation-beating returns," he said.
Research by BCG Global Asset Management in 2020 showed that the industry expects alternatives such as infrastructure and private equity to represent 49% of all global asset management revenues by 2024 even though they'd still be representing only 17% of assets under management globally.
Everyone is playing catch-up
David Moore, head of alternative investments at Alexander Forbes Investments, said some of the smaller pension funds who invested nothing to these alternatives five years ago are now looking to allocate as much as 5% of their assets to the private market.
"If you compare that to five years ago at zero percent, that's a big increase," he said, adding that the attraction was the targeted focus on things like infrastructure, SME finance and private equity.
Some big names like Old Mutual's Futuregrowth Asset Management have been focused on private markets for years, funding not only big commercial infrastructure, but also the building of social infrastructure. But alternative asset management companies and private equity firms like Ethos have predominantly owned this space.
Moore said this is changing. More big names in the financial services space are launching new products to invest more into the private markets, from debt-focused to infrastructure funds as well as generalist kind of funds that will invest in energy, ICT and water projects, to name a few.
"I think the large asset managers are catching up to some of the first movers in the space, the likes of Sanlam and Stanlib are playing catch-up quite quickly," he said.
The demand from investors who want to reap the returns that the private markets generate, and a good pipeline of investable projects is making everyone realise that this is the space to be. The industry is also seeing the emergence of highly skilled, niche-focused boutique players who come from big asset management firms an investment banks wanting to use their skills to deliver on these socially beneficial projects.
"I think it kind of speaks to the fact that there are a large number of fundable investable, commercially viable projects that can create huge social benefits and deliver returns at the same time that these managers are seeing and are obviously mobilising capital to fund," he added.
Development and returns can co-exist
Isaah Mhlanga, Alexander Forbes' chief economist, said the view that financial returns and development cannot happen at the same time needs to be dispelled.
He pointed out that other emerging markets - that South Africa is often compared to - invested adequately in sectors such as agriculture, manufacturing, energy and construction. And, because of this, their average annual growth over the last decade was 3.7%, while South Africa's annual growth was 1.7% over the same period.
"Yes, there are other factors that contributed to SA's slow economic growth… But primarily, the nature of South Africa sectoral economy is just not geared for growth because we underinvested in sectors that can actually boost economic growth," he said.
He added that the more investors back private markets, the more South Africa will be able to raise funding for the critical infrastructure projects the country needs.