Following a tumultuous year, 2019 is shaping up to be a tale of two halves for South Africa. Expect a volatile market in the lead up to the general elections in May. This period will be characterised by a great deal of political noise and policy uncertainty, with a tough budget speech by the new Finance Minister in February as the plight of SOEs weighs on the fiscus.
The risk therefore remains that South Africa's credit rating could still be cut to junk by Moody’s Investors Service, which begs the question, where should high-net worth (HNW) investors put the bulk of their investable assets?
For those who are able to take a long-term view and are willing to absorb the loss in liquidity, private equity is a good place to be as global trends suggest premium returns can be realised from non-equity asset classes.
We like alternative investments right now because there is a large gap between private and public valuations and the price investors are paying for liquidity is, in our view, inflated. We also believe that private capital makes the most money when public capital markets contract.
However, a portfolio weighted more heavily in private equity won't insulate investors against prevailing risks, because the sector is ultimately exposed to the same factors as public markets. What these investments offer instead is a better opportunity to ride out the volatility and realise a return on the back end of the current cycle.
The key to leveraging private equity opportunities is not fundamentally about taking less risk, though. Rather, it's about about choosing an investment manager that has the ability to raise the capital needed to meet fund minimums; that can access the right opportunity or basket of opportunities at the right time, through the right partners to execute investments that generate value; and, most importantly, exiting at the right time to generate the right return, which requires the ability to find the right person to sell to.
In this regard, investors currently have a variety of options to access private equity investments. These include investing in a managed private equity fund or accessing single opportunity investments. If you invest with a provider like Stonewood Capital you won't need to choose.
By offering a basket of options, which are backed by industry leading processes and an established global network of private equity partners, we are uniquely positioned to offer HNW clients access to a breadth of investment options that best address their specific requirements.
We primarily pick funds that address idiosyncratic needs. Importantly, through the relationships we hold with leading global players and some carefully chosen boutiques, we are able to pool private investor and family investments to give our clients access to these unprecedented opportunities and allocate capital into large-scale projects.
And by augmenting this offering with a range of single opportunity investments, which include our own stream of sourced offshore options and a variety of those offered through our partners, we offer exposure across growth markets through a range of alternative investments that span infrastructure, credit, property and out-and-out private equity investing.
We also see additional private equity opportunities in alternative funding platforms (AFP) and preference capital providers, which will increasingly deliver good growth as tighter lending criteria from the major banks and vanilla financiers forces consumers and businesses – particularly SMEs – to look elsewhere to access funding.
This risk aversion means public equity players can add a layer of funding to meet the demand that will realise good returns. We see these providers as the cement between the bricks of the local economy, as they plug the capital and cash flow gaps emerging between businesses and the banks. As such, we believe both private and listed AFPs would offer opportunities to realise short-term and long-term returns.
Significant opportunities also exist in the offshore private capital sector, particularly in real estate where the asset is underpinned with operational competencies. We're extremely confident about this sector, so much so that our Stonewood Alchemy Real Estate (SARE) business recently lead a consortium of US, UK and South African investors into a R1.2 billion investment in the US extended-stay accommodation sector.
We believe these types of extended-stay properties offer investors an opportunity to leverage demographics and the skill and expertise of the management team to drive growth, instead of relying solely on capitalisation rates, which is important in a rising interest rate environment.
Rounding out the private equity portfolio of any astute investor should be investments into companies that create scalable platform software for industry 4.0 applications. However, rather than investing directly in businesses and services that seek to disrupt industry verticals, which are often boom or bust sectors, we believe the real value resides in the those companies that develop the underlying technologies that empower the disruptors to disrupt.
With this diversified approach to private equity investing in 2019, we believe clients will find adequate cover from the headwinds that will plague equity and bond markets into next year, while offering robust growth that will deliver some redemption from the market volatility.
By Eldon Beinart, CEO at Stonewood Capital