The Minister of Energy, Jeff Radebe, signed contracts worth almost R56 billion with 27 independent renewable energy producers early in April after significant delays.
The projects are expected to create thousands of jobs and to lower electricity costs.
While such projects can be beneficial to an economy in desperate need of job creation, the reality is that pension fund members and other investor groups often don’t have the opportunity to benefit from such investments as they are generally unlisted.
Regulation 28 of the Pension Funds Act, which governs the maximum allocation to various asset classes, is relatively friendly towards alternative investments. It allows pension funds to invest up to 15% in these assets. The allocation to hedge funds and private equity is capped at 10% each.
The reality however, is that pension funds are generally not using these allowances.
Other investors in this space include ultra-high-net-worth individuals, foundations and family offices. Historically, banks and life insurers were also large participants in the alternative space, but changes to regulation (Basel III for example) mean that it is less capital efficient for them to invest in this area. The conversion from a defined benefit to a defined contribution pensions landscape – which effectively moved the investment and longevity risk from the employer to the individual – also means that investors have changed from large sophisticated firms with lots of money and patience to individuals who are generally less sophisticated and who have less money and patience.
Unfortunately, there is really only a handful of South African investors large and sophisticated enough to participate in alternative investments, says Chris Roelofse, head of alternative investments at STANLIB Multi-Manager. “Therefore, not enough money is going to these investments.”
While alternative investments tend to offer higher long-term returns than traditional assets like listed equities, bonds and cash, behave differently to other investments and have a strong social impact, most investors are unable to embrace the asset class.
Roelofse says alternative investments are often private, unlisted investments and are generally very complex. Investors need to know what they are doing and understand what will drive the value of the investment as they can’t rely on regulators for due diligence.
Moreover, if a pension fund decides that the job creation and return prospects of a private equity fund are attractive, the fund will most likely have to invest a minimum of R50 million to get access to a single fund with only a handful of investments and that require investors to lock-up their investment for at least ten years, making it an extremely illiquid investment.
Even if the fund could manage to overcome these obstacles, it is not as easy as writing a cheque. The investor generally has to commit and hold the money as liquid cash to be able to meet drawdowns as and when the private equity manager requires, Roelofse adds.
“This is just not something that most investors are set up to do. It is a hassle, it is complicated and therefore, despite the initial excitement about what the investment can offer, they just never end up executing on the investment because the barriers are just too high.”
The extended equity bull market investors have enjoyed has also created a degree of complacency. Investors likely reached their medium-term investment targets by merely allocating a sizeable portion of their portfolio to equities. But listed equity is cyclical which makes it vulnerable to the next market downturn. In such market conditions it benefits investors to have investments that are uncorrelated to listed markets and not as volatile as listed equities.
Roelofse says it would not be practical to expect any investor to put the majority of their money into these types of illiquid and complex investments, but the industry has to find ways to better enable investors to access alternatives alongside other traditional investments.
“It is the industry’s responsibility to create a friendlier point of access to these investments.”
To do this, Roelofse believes fund managers with specialist knowledge and research teams should identify a variety of these investments, combine them in one large pool and then allow investors to participate with relatively smaller amounts of money whilst also having the option to cash out if they need to. At the same time, the manager should take care of the complexity and governance requirements needed.
STANLIB Multi-Manager already manages R8 billion in this way with Roelofse as the portfolio manager for the past six years.
Against this background, STANLIB Multi-Manager will be launching a number of pooled funds in the alternative space in May. It aims to overcome the various barriers to entry by allowing a minimum investment of R1 million and access to the funds at three months’ notice. Qualified investors will get access to a regulated pooled vehicle through a globally diversified fund-of-funds that offers instant access to various alternative asset classes – including infrastructure, private equity, private real estate, hedge funds and more.
Brought to you by STANLIB Multi-Manager.