Government’s investment arm, the Public Investment Cooperation (PIC), and various State development banks and institutions have taken centre stage in South Africa’s private-equity investment sector, representing, for the first time, the largest chunk of funds currently under the management of private-equity fund managers.

The latest survey by KPMG and the Southern African Venture Capital and Private Equity Association (Savca) shows that private-equity investments in South Africa remained steady over the prior year, with funds under management rising from a restated R169.3-billion in 2013 to R171.1-billion in 2014 – a slowdown on the 17% year-on-year growth reported in the prior year.

However, government pension fund managers are increasingly upping their game in the sector, with the 2014 Venture Capital and Private Equity Industry Performance Survey reporting significant growth in government investments during 2014.

The Captives-Government category, which included the PIC, the Industrial Development Corporation and the Development Bank of Southern Africa, now accounts for 38.7%, or R66.3-billion, of the R171.1-billion of funds under management, surpassing the 39 independent firms, with an aggregate R66-billion, or 38.6%, of funds under management, KPMG private-equity partner Warren Watkins said at a recent media conference.

Unpacking the results of the survey at KPMG’s headquarters, in Parktown, he said the Captives-Financial Services category accounted for R29.2-billion in the period under review, a contraction from the R30.3-billion in 2013.

The Captives-Government category had steadily increased its share of funds under management from R12.1-billion in 2009, after Regulation 28, which governed pension fund investments, increased the permissible allocation to private equity from 2.5% to 10%.

Watkins noted that the Government Employees Pension Fund had granted the PIC permission to allocate 5%, or up to R50-billion to R60-billion, of its R1-trillion portfolio to private equity investments.

In 2012, the PIC had accounted for R24.8-billion of the R42.4-billion of the funds under management in the Captives-Government category, doubling it to represent R44.3-billion of the R63.3-billion in funds under management, reported in 2013, before ticking up marginally in 2014 to account for R45.4-billion of the R66.3-billion.

“Private equity has seen a significant increase in investment from the government sector over the past five years and the growth effect on portfolio companies, given historical results achieved by private-equity fund managers, should be very positive,” said Savca CEO Erika van der Merwe.

The survey shows that ten-year and five-year returns in the private-equity market average around 19.1% and 17.7% respectively, above the 18% and 16% returns of the JSE All Share index. Three-year returns average 14.1%, compared with the All Share index of 19.5%.

“Many of the investments are still to be realised and may reflect conservative accounting valuations. “Private equity has historically reflected con-sistent returns above equity markets, a fair return for the perceived risk, but an increasingly attractive market for the pension fund,” Watkins explained.

However, the South African private-equity industry has returned the highest amount of capital since 2011, with funds returned to investors increasing 44.7%, from R9.8-billion in 2013 to R14.2-billion in 2014.

“There was an implied times money multiple of 2.3, which is a significant increase on the 1.6 in 2013 and the 1.2 in 2012,” he added.

“In general, we expect to see more activity by pension funds in the next few years. This is because these investors make decisions based on both investment returns and societal impacts. They are particularly interested in the high employment and development characteris- tics that tend to accompany private-equity investment.”

Meanwhile, R144.2-billion of the funds under management is owned by black-owned fund managers (50% or more black-owned), which accounts for R9.7-billion, black empowered (25% to 50% black-owned), which holds R30.4-billion, or black-influenced (5% to 25%), with R38.2-billion.

Black economic-empowerment (BEE) investments remain a significant portion of investment activity in South Africa, with the number of BEE investments having increased from 236 in 2013 to 267 during 2014.

Of the R17.4-billion invested in 2014, a total of R12.4-billion was classified as investments made into black-owned, black-empowered or black-influenced entities.

“Many of the private-equity transactions today have a BEE component to their structure, which assists in facilitating BEE shareholdings,” Van der Merwe noted.

Meanwhile, R54.9-billion of the R171.1-billion in funds under management is yet-to-be-deployed undrawn commitments and comprises R29.6-billion from independents and R18.9-billion from government.

The survey also shows that South Africa’s independent private-equity investment as a percentage of gross domestic product (GDP) increased from 0.17% in 2013 to 0.21% in 2014, which was higher than China’s 0.15%, Russia’s 0.004%, Brazil’s 0.12% and India’s 0.19%.

However, Israel, the US and the UK’s private-equity investment as a percentage of GDP for the year under review remains well ahead of South Africa at 1.64%, 1.23% and 0.81% respectively.