Mhm. Welcome to asset tv's roundtable on private equity with me, Joanne Benham today, I'm joined by Farrakhan investment partner at Old Mutual private equity Timbul, Head of Product management, private equity Schroeder's and Langa Madan Co non executive director at South Africa longer. I'm gonna kick off with you Regulation 28 on private equity. What are the proposed changes? When do you think it's going to take place? Um Thank you very much, Joanne. I think the proposed amendments look from a private good perspective anyway, uh to decouple um private equity and hedge funds. Historically, private equity and hedge funds have been in the same cluster and these amendments look to separate them. Um the second um significant element on the private equity side is uh an increase in the amount that can be allocated to private equity from within the pension funds, where it was 10% across private equity and uh and hedge funds. The proposed amendments now tout a number of 15% for private equity. And then of course, you've got other pockets of incentives for private equity investing within the infrastructure cluster. Um I think we got a second an opportunity for a second round of comments um uh late last year around october and we are hopeful that maybe by the time we get to june we should have had something coming out of the National Treasury with regards to the amendments, just make clear here longer it's infrastructure and private equity seen as separate or with private equity. A subclass of infrastructure. Just explain that to me. So I think um infrastructure is a subset across multiple parts of regulation 28 because I think the amendments are looking to promote investment in infrastructure where there will be an equity component that is required for funding that infrastructure and that equity component, it is believed that privacy could, will play a significant role in terms of funding that component. Um there's also other instruments that come into play that some uh sometimes a house within the private equity cluster, such as Mezzanine debt, which um as well will come to play a role within the infrastructure spending. But there's promotion of infrastructure almost across all The classes within Regulation 28, such as private debt, for example, to stimulate investment in that space. Okay, so tim um there are different ways individuals and institutions can access private equity. Can you explain to us in layman's terms what these different methods are? Oh yeah, happy to do so. So the classic way has been through a limited partnership fund. And that's been the case for, you know, the 40, 50 years of private equity has been really accessible by investors. And the limited partnership fund was set up primarily for institutional investors. And the concept there was that an institution would make a commitment to a fund which would effectively indicate the amount that they wanted to invest and the manager or the general partner as as soft and called would cool that money as they found transactions because the most important thing to remember with private equity, It's all around transactions. That is how the money is actually invested. It's not as though you can go into the market and say I'm going to buy 10 different private companies at that point in time, you have to line up the transactions. So the limited partnership fund has served that purpose very well. And it's been away which institutional investors have been able to access private equity. The shortcomings with limited partnership funds is that you typically get a capital call notice With five days with which to wire your money. So you may have made a commitment to 50 million. You may get a capital call of say five or 10 million and you have to wire that across the to the G. P. Often there's also been quite high minimums as well. So limited partnership funds find for institutions haven't been as appropriate for individual investors or wealth managers. So with what has been what's been developing over the last few years has been funds designed specifically for for for individual investors. And that has been either by by promoting more semi liquidity. So allowing investors to invest in the fund but also giving them a means to exit. That's been one innovation plus closed ended funds which are funds which you hold the term, they have also been designed around the needs of individual investors, individual investors. So for example with lower minimum. So it's more accessible for investors to invest $50,000 for $100,000 plus the shorter terms. So there's less sort of The the investor is not tying their money up for as long a period as sort of 10, 15 years, it tends to be a slightly shorter duration. So there's been a lot of product innovation around that. In addition, there's also been regulatory changes as well. So regulators in many countries around the world are also seeing the opportunity and the demand coming from individual investors to access private equity. So the regulators have also been looking at ways that they can make sure that they, that they allow investors to access private equity, but keeping the same, the same guidelines, the same principles to protect investors. Um, you know that they have in the more sort of standard and classic ways that, that individual individual investors have been invested and tim you're trying to bring products in africa what type of product is a measure of institutional market on the retail market that you're bringing through product. So in fact, we had some good news yesterday that we received our Cat one and cat to license. So delighted about that the product that we would be that we're looking to to to start discussing the South African investors is a global private equity semi liquid fund and it's a fund which we launched about 2.5 years ago. It goes back to the concept I said earlier around how do you create a private equity product that's suitable for individual investors, you have to create some liquidity. You have to allow them to access the funds by a single subscription. You can't have many capital calls. That's too complex for many individual investors to be able to be able to cope with that, that administrative, administrative side of things. So it's a single single investment, very much like a mutual fund. And it also allows investors to redeem from the fund every quarter. And that's again, that principle of that similar liquidity and the way we tend to think about liquidity is there are two types, there's a liquidity that an investor might need because they want to buy a house or other big, big item and then there's liquidity that that investor needs because the market crashes and every wants to run for the exit this fund very clearly caters for the first, that doesn't cater for the second. So, you know, you have to make sure that there's, that investor behavior is managed in a way that doesn't allow investors to start running for the exit to the detriment of other investors that are in the fund and that's why we call it semi liquid. Okay, very good. You've been in markets a long time, both an institutional retail space. Do you think private equity is suitable for retail investors? I think joe it's, it's an interesting question because we innovated a retail private equity product at old mutual private equity in the mid two thousands. And whilst it was successful for us, it did come with quite a host of challenges. Um, I mean, we were lucky enough to, to have the balance sheet of the old mutual group to underwrite the liquidity that Tim was describing. But ultimately, the major challenges that come that arise are mostly because of the long dated time period, as to mention, So 12 years you're tied up in a fund. And what's typical in private equity is what is referred to as the Jacob. So as Tim also described early on, you are, you know, withdrawing management fees from your investors, but you don't have any assets. So you have kind of a period at the beginning where you're just drawing fees, but no assets and that is quite foreign to a retail investor. So you want to be able to match liquidity, you know, match all of these things that the retail investors not necessarily used to. And unfortunately you need an underwriter to be able to do that. So we were fortunate enough in old mutual being able to do that. But unfortunately, when somebody does that, you know, there are economics involved, you know, old mutual needs to be compensated for that. So what happens then is you've got this very complex product that has got layer upon layer of fees, low liquidity and a very long lifespan and retail investor tends to look at that quite poorly. So we managed to do it successfully, but it does come with its challenges. Okay, langa, I'm hearing challenges and I'm hearing opportunities. What's Africa's thinking on the, you know, is it suitable for the retail client? I think our current stance is um, similar to that, which I've had just shared, that we believe it is currently more suited for institutional investors. I think we also see the same level of challenges in terms of adaptation towards, um, them being accessible to the retail market. But I do think, uh, we do have to be thinking about ways in which we can create, um, innovation and create, um, uh, liquidity without necessarily with, with the contradiction in that. We also have to find ways in which to ensure that we don't price out the product from being desirable too to the retail space. Because I think especially in a market like South Africa, where you've got some form of diminishing uh, exchange where companies are delisting in order for people to continue to achieve the returns, you'll have to some find a way to start participating in the unlisted space too, achieve the return the desired returns that they're looking for. So he wants to say something. Yeah, I think, I think both both language and and empowered. Make very good points. I think firstly the Jacob point, which parent mentioned. Absolutely. That is that is a challenge. And, and that's, you know, alien to too many individual investors the way I think it's important to to try and address that is by using different types of investments. And so what we've done with when we launch a simulated fund using co investments and secondaries and that takes away some of that Jacob effect and that I think is something which is important because you need to have that investment pipeline lined up and co investments allow you to deploy money relatively quickly. So I think Jacob absolutely is a challenge, which has kind of been a bit of an inhibitor to providing access to individual investors in the past. I think with the development within private equity, I mean, the secondary market in private equity now is so much more advanced, so much more developed than, say it was a 15, 20 years ago, which brings in new, new possibilities when you're structuring a fund. And I think, I think the other point that that that language makes is around kind of, you know, providing access, that I think is also a key concern for a lot of investors because they see the choice on listed markets shrinking and being able to provide investors with access to some of the companies which which are choosing to stay private for longer or even choosing not to come to the, to the, to the listed market at all. For me, that's a very important principle that regulators should be, you know, should have the forefront of their minds when they're saying right, you know, if we want to give individual investors access to private equity, we're doing it so we can increase their investment universe. So I think it's an important principle that mango raises their long ago when you and I have spoken before, you made this fantastic point to me, you said, what is the point of saving for tomorrow if you can't live today? And, and so many people in the pension industry keeps saying people don't save enough, but I think they don't understand the challenges of a lot of people in South Africa. Why do you think private equity adds so much to the pension portfolio in terms of what it adds. Look so, yeah, I think it's a, it's a, it's a very important thing to note that the South african um, socioeconomic landscape is probably one of the most uneven, um, if not the most uneven in the world. Um, and we do have a shortfall in the backlog in terms of delivery of infrastructure in terms of, um, how quickly we're able to create jobs. And I think the private equity plays a role in terms of being able firstly, hopefully to deliver the desired financial returns, because we can't understate the fact that the reason why people are investing is to achieve financial returns. Um, and generally, if you've looked at the South to surveys, if you've looked at surveys globally investments in private equity tends to outperform the listed market, um quite a bit in terms of delivering the financial returns that are required. Um but the second one is, private equity is able to drive the social agenda in terms of that, private equity can infuse capital into those smaller growing businesses where we believe, and as the president will have said in the state of the national test, will create the jobs that we are looking for. Uh secondly, private equity can channel um capital into infrastructure and addressing some of the issues around um the gaps that currently exist. I think we're seeing a lot of private equity funds that are geared towards delivering solutions across different infrastructure strategies such as roads, bridges, um schools, hospitals, um and all those other asset classes that all those other subcategories that fall within the infrastructure space. And then thirdly, I think private equity is also well geared um to be a champion of our movement movement and transition towards a net zero economy. Because I think again, private equity can be one of the first and leaders in terms of accessing some of these opportunities in businesses that are bringing about innovation at an earlier stage um and before they're even listed. And it's quite critical in terms of also using the combination of the skill set that exists within the firms and the capital that the private equity firms are able to gather much easier than the companies themselves would have uh to grow these companies and to fully exploit the potential that exists uh in those segments and spaces, okay, like you've brought up so many concepts there, you're talking about good returns, you're talking about creating jobs, you even brought in E. S. G. So far, and I'm gonna start you now with E. S. G. Talking about E. S. G. And private equity in South Africa Interest, what your experience has been so joe, I think E. S. G. Is quite a buzz word and has been for the last couple of years. I think we as old mutual private equity have utilized the term responsible investment for a number of years. And we started it out at a much more basic level, just looking at businesses that are good to invest in from a social perspective, we tended to stay away from microfinance business, we tended to stay away from gaming, gambling, alcohol, um those kinds of industries and that was purely out of a desire to be a responsible investor from the start as ES. G. Started becoming more mainstream. We've obviously developed a lot more complex systems to report on it. But I think the just of it, joseph follows, we we have an ability an innate ability in private equity to directly influence outcomes at a company in terms of, you know, environmental, social and governance scores. So to start off with the E I mean, I'll give you a small example in the business that I'm involved in. We are slowly transitioning the business from plastic bags to paper bags now it sounds like a small thing, but in a business that's turning over several billion, that amounts to quite a bit of impact. And the reason and the reason why we wanted to do it was it's very obvious, plastic just creates a huge problem. And how we went about it was we simply asked a question at R E S G or SCT subcommittee of the board and said, look, this is something we need to do. We didn't have to wait. We didn't have to influence, we just did it got on with it and within, you know, a couple of months, this is something that's been driven at the business. So you can drive change very quickly, very impactful e at a company and the same goes for the social or the governance scores. You know, you don't have to wait, you just pull the trigger, just get on with it. And we are able to do that because we sit on the board of the company. We influence our chief executives on a day to day basis and we are able to drive change very actively as opposed to in a list of environment where you sort of sit in the MGM and raise your hand and say please do this that. And the other and you kind of get a small head waggle from the management team and maybe they do it. Maybe they don't, but we can actually influence change a lot more actively and we've been successful in that. Okay, um, for our talks about active engagement, would you say that's one of the big pluses for private equity? And where do you trade within that private increase space? Are you giving them capital to invest in new businesses? Are you giving them capital so they can get out of the business? Maybe just give us a better feel for this active engagement process? Sure. I mean, I wholeheartedly agree with everything he has said. I mean, you know, in our, you know, in our experience, you can drive so much more change in a much quicker timeline than when you through private equity because you have that, that, that access to the, to the management and the board and you are, you are a meaningful shareholder, you know, compared to even the biggest, um, asset managers for listed companies. You know, you have a small percentage of the overall company. And, and the means by drive by driving changes is so much more, so much slower. So, you know, we see it is very important. I mean, a large part of our investor base is actually german institutions and, and I'd say Germany is probably one of the more advanced countries in terms of the institutional investors, there have been applying quite strict criteria into the sort of investments they do. So We've been applying an ESG criteria to our investment process for over 10 years now. And that's a very important part of every investment that we look at must satisfy that criteria. So if there's anything some of the concepts which which fired mentioned, so any military connection gambling or drugs or other sorts of kind of, you know, other other parts of the, of the economy which we are not comfortable in say, for example, having the ceo of that company stand in front of our investors and present. We don't want to go near that company. So very, very important principles that we that we follow and what we're seeing is that, you know, whereas previously, you know, that was something that you get in just a few, a few markets. It's, it's really, really growing much more widely now. So within the EU you have new regulation that's coming in, which is, which many institutions are now requiring funds to satisfy this, this new criteria. Even in the US where in the past, you know, you speak to US investor, they were only interested in one thing and that's a financial return. Even the US now we see with some of the conversations we're having institutions, they are taking more notice around the non financial measures of the fund and that all required reporting. So that means you need to have good information from the companies you're investing in to be able to report on things such as carbon emissions, social aspects such as kind of the, you know, the quality of the jobs of the people that that those companies are employing governance measures, you know, gender equality, racial equality, all of these things now are much more important and are putting new pressures on us because we have to capture all that information to be able to report on that to to our clients, to our investors Ferrari. I'm quite cynical when it comes to markets and when I hear A. S. G. And you know, clients are insisting it because they don't want just above returns. Is that because we've been in a bull market for so long. I mean, is it because returns have been so good people now want the fluffy stuff and the nice to have stuff or is it do you think genuinely people are changing their attitudes? Absolutely, genuinely. People need to change their attitudes. I think it's across the board. The simplest one that comes to mind for South Africa is if you think about the social aspects, you know, two longest point of earlier on, we are one of the most unequal societies in the world. So from a social aspect we have a food manufacturer in our portfolio, we employ more than 10,000. You know, workers mostly unskilled workers, mostly female. No, these are these are individuals that live in rural areas that need to go and work in a factory and the kids stay at home and garden Fed, the schools that they go to, they need to make sure that the Children are fed. So to use a very simple grassroots example, in an instance like that, we need to come together with the communities and actually build kitchens, build kitchens of the schools at the factory so that you can number one, nourish the kids make them want to learn more and then better the society. So, I think that's a very simple grassroots example. I absolutely think that it is a necessity. So, the social aspects and s are very important from a governance aspect, it's the same thing. I mean, you've got to insist on making sure that you have proper governance processes and businesses, you can run a family business for a very long time, you know, on a sort of informal basis, but ultimately, when that business reaches a certain size, it needs to subscribe to proper governance processes if it wants to go anywhere, and if we just took a laissez faire approach to that, you know, it would never work. So, I think all of this is is it's weaving a story that carries the right message and is absolutely necessary across across the across the globe, tim longer mentioned returns earlier on. So, I'm gonna ask you this question now, we see the U. S. Face is going to be raising interest rates potentially more aggressively than one first thought last year. And we know, private equity globally at least has done incredibly well. Are you worried about the future returns to the private equity space given a title liquidity liquidity environment that we're now facing. So I think there's there's different ways you can, you can look at the situation. I mean, certainly at the moment it feels as though the interest rates are going to be increasing. I think central banks across the world that are taking the threat of inflation very seriously, does that impact companies with strong growth strategies? Absolutely. Because it makes kind of, it increases the cost of capital and therefore makes kind of future profits, you know, therefore kind of less less attractive. Does that just affect private equity? Absolutely not. It affects every asset class. So I think to say that this is a private equity problem versus another asset class problem is looking at it from the wrong way. It's, it's going to affect all asset classes. Private equity has outperformed listed equities over the last 2030 years. Do I think that's going to change? No, I don't. Because I think there are other aspects around private equity investing which which have supported that, that that delta between the listed equity returns and the private equity returns, I mean, listed equities, I'd say is they're very accessible. They're very easy for investors to access. And whilst liquidity premium has been or illiquidity premium has been kind of, you know, talked about a lot of private equity. I think it goes beyond that. I mean, I think it's around how the investments are structured, it's about investing in companies at an early stage of their growth. So, exactly, picking up the point that he was saying around, you know, you're being able to take that company from a transition from family ownership to to be able to expand into new markets by providing it with capital. So without a doubt that there are going to be some headwinds facing, facing us over the, over the coming years, um you know, but it's going to happen across all asset classes. The one last point, I would say as well, is that, I mean, I think the situation in the global economy is one where, I mean, you have strong opinions in many different ways. One of them is that this is just a temporary blip. This is that this is more kind of long term systematic What we found in 2016, where there was a bit of that sort of, you know, you know, kind of a concern around rising interest rates. There is that it did, it did impact listed markets. It didn't really affect the valuations within private equity because there is a little bit of a lag effect, because, as I said earlier transactions are what drives private equity. So you don't immediately see the change in valuations in private equity and it's for that reason that institutions like it because of lack of volatility, but, you know, it's the outcome will be different depending upon whether this is more sort of long term structural change or whether this is more just a temporary sort of response to supply chain restrictions that have been, you know, kind of a legacy of the of the of the of the pandemic. But we have had very good returns and probably very globally we haven't in South Africa, I don't think as much fraud or maybe I'm wrong. Well, what's been the experience of private equity returns in South Africa? And where do you see it going? Look, I think just to, to take on to the point of earlier, joe in the US. I mean, private equity returns have been really attractive. You know, fortunately for the U. S. They have had the the the artillery to be able to, you know, help help boost things. They've had great GDP, they've had, you know, extreme liquidity, very strong ability to gear. Unfortunately in South Africa, we've been the polar opposite. I think we've had potentially, You know, eight years or so of sub 3% GDP growth and maybe one or two of those years even in recessionary uh situations. So I think for us, you know, South Africa has been a very different situation. The debt is what it is, but private equity is a real asset class and it requires, you know, the tide to lift all ships. And GDP is that time. And because GDP has been so poor. private equity has not have had a great kind of run over the last eight years or so. I mean that's why we like this space is within that segment and particularly in the mid market space, there are smaller businesses, mid market businesses that you can still access growth. And this again, testimony to the fact that the team turns over so many rocks to find attractive businesses which still exists in that space. There are smaller businesses that are taking market share. There are smaller businesses that are able to grow at a much more rapid rates than the broader economy is growing. And that's what remains the attractiveness for us. We still see a very vast universe of assets within private equity in South Africa where we can allow our investors to access, you know, rates in excess of the listed market langa, we talked about creating jobs in private equity. What are the three kind of key areas you think we can create jobs in this country, in private equity, which particular areas are interesting for you? I think definitely infrastructure is, is one of the most obvious spaces. I think, um, the leg that we have in terms of the delivery of infrastructure, the maintenance of existing infrastructure lends itself to a situation whereby it will definitely be one of those um, spaces that will definitely catalyze uh, employment in the South African context. I think the second one is um, and should be in the area of beneficiary shin, I think South Africa is a large producer of a lot of raw materials, whether be it in the mining space or in the address space. And I think the creation of centers of Beneficiary nation um locally would lead to the creation of a significant number of jobs and an uplift in terms of the value that we would extract from being a resource rich country. And then the last one I think is definitely going to be in the area of food security. I think this is a not just a South african theme, but a global theme and we have quite rich uh potential to produce in the Agri space and in the food space uh subsequent to that, and again, linking the Agri space to Beneficiary nation. If we could go a little bit further in terms of the processing that we're able to do to service not only the South African market, but the export market, I think that's another space where definitely there will be a boom in terms of potential to create jobs. I think it's funny that in the South African context, I think many of the jobs that can be created will not come necessarily from the sexy spaces, but from us getting the basics right uh and rebuilding or enhancing um what we have as a country and there were the jobs will come getting the basics right, I love that. Lango okay, before you guys go, we have to talk about fees. So garage fees are high in private equity. Why? Yeah, it's, it's the swear words, It's always fees, fees, fees, why your private equity is charging so much fees. I think it's, it's very simple, joe we, the way we like to explain it is intensive stewardship um you know, as I was alluding to earlier, managing a private business is heavy lifting for private equity managers. We are engaging, our chief executives are cfos, our management team on a weekly basis and it's not just kind of remote engagements were on the ground, we're engaging deeply. So the level of active stewardship and intensive stewardship requires a certain level of skill and experience. And unfortunately those skills and experience do come somewhat dearly. So, you know, when we charge the fees that we charge, it's because we need to be able to steward our assets in such an intensive manner and because those skills are so expensive, so it's not necessarily that they are high, they are appropriate for the job that is required in order to deliver the returns that we want to deliver to our clients. I think from a performance fee perspective there should be absolutely no doubt that it is appropriate because we only share in the performance fees once a hurdle return is actually delivered to the clients. So I think it's all about context. So if you think about comparing it to a standard listed market and you look at the, the differential in heavy lifting. If I could call it, that's really where the value comes in, in terms of what the fee that you're paying tim do you have any rebuttals to that, anything you want to add? I'd agree with that. I mean I think the other thing, which I think a lot of people overlook is that when you invest in a listed company, there's a lot of regulation that they have to, they have to conform to, so they have to provide, you know, potentially quarterly reporting. They've got a whole department's full of people to ensure that they can, they can adhere to all of the governance requirements for listed companies. Now those, those extra costs are actually in the company, they're in the cost structure. And so a certain extent, I think private equity is unfortunate in the sense that some of that stewardship which which was was referring to is with the manager. So the cost basis of these companies are, you know, they are different. So I think, you know, the time it takes to find a company to find a transaction, you know, that's a long, often there's a long courting process for for private equity manager to find the company an appropriate investment to structure it, you know, working with the entrepreneur or the founding family, all of that takes time and then you have that stewardship concept, All of these are costs, which which the GP, which the manager bears and you know, therefore comparing listed with private equity I think is a little bit comparing apples and oranges, mango, you get to have the last word here, it's pretty obvious listening to this call today that private equity adds something different to a portfolio and adds a different return profile. What has the experience been in South Africa, what are our pension funds doing? How much money are they allocating to private equity and not the actual random amount? The percentage is, what are you seeing? Um so I think traditionally the percentage has been quite low, a significant proportion of the capital that has actually been in private equity has come from outside the country, but the, the thematically, I think that is changing, I think um we are seeing some growth in terms of pension funds coming into, into the space, um speaking uh, as one who spends quite a considerable amount of time in that space, I think last year alone there were about 19 pension funds who made an allocation or created a policy towards allocation to private equity for the first time. Historically, I think the survey, that software data produced in 2019 would have told you that the proportion of pension fund assets that were in private equity at that time were less than 1%. Um I think we are getting close to 1% and regulation 28 is trying to push us in the direction of 15 um in terms of allocations in the space, um I think thematically as again, the JSC continues to shrink in size um as um volatility continues to be a concern. I think there will continue to be an increase in terms of the proportions to which pension funds allocating to, to to private equity. Um I'm hoping that especially after watching this, there will be a greater increase in terms of allocation to private equity. Thanks gentlemen, there was a very insightful discussion on private equity and a civil Ramaphosa recently discussed the state of the nation address. It is small and medium enterprises in South Africa that create jobs, private equity could be the way to do that. Thanks everyone for your time today. Thank you.