Of course, when one looks at prosperity, it’s easy to think that to be prosperous, you must have a lot of money. This is no longer the case. True prosperity is born when external affluence supplements inner wealth. To that end, setting prosperity in motion requires more than a good first investment – or even a succession of good investments. Instead, it requires foresight, knowledge, experience, agility, consistency, and an unswerving, eyes-wide-open approach based on the understanding that realities can and do change. 

It’s no coincidence that these are the same requirements involved in smart investing, particularly if the name of the game is private equity. 

The Rise of Private Equity

The demand for private equity in South Africa and other African countries has steadily continued to increase. According to the global law firm White & Case, private equity in Africa saw record-breaking numbers in 2019 at the peak of an upward trend. The Africa Report also published data on the 2021 private equity landscape in Africa, including research that showed that a total of 600 firms are tied to investments on the continent. Of those 600, South Africa is home to 174 firm headquarters and regional offices. Altogether, Nigeria, South Africa, Egypt, and Kenya received 85 percent of private equity funding in the African region (equating to $1.7 billion).

In a recent review published by McKinsey, the net value of private equity has grown more than sevenfold since 2002. That’s twice as fast as global public equities.

Undoubtedly, private equity offers extremely favourable benefits, including higher expected returns, stable to low market volatility, and social and sustainability impact. Moreover, regardless of which of these benefits piques your interest, private equity investments also afford you the ability to diversify your interests.

For many, though, the obvious investment vehicle would be stocks and not private equity. It makes sense, given that while the overall economy is still suffering from the Covid-19 pandemic, the stock market has already shown signs of bouncing back. 

The real question remains – can you afford to only have access to mainstream asset classes? Wouldn’t it be better to diversify your portfolio by including alternative asset classes?

Could it be that the answer is so simple? In truth, you really can’t compare the two. They perform different functions in terms of risk and volatility, yield different results, and frankly, you need to determine your appetite for either. What may seem like a good investment today might very well become too risky, or conversely, too safe for your liking. 

As with any well-managed investment portfolio, the key to prosperity and smart investing is diversity. Essentially, smart investing boils down to your ability to review the myriad of options and wisely diversify your portfolio to include both asset classes. 

Of course, that doesn’t mean that it’s easy.

You may be feeling a surge of doubt surrounding your ability to make smart investment choices. You’re not alone. One of the most common concerns we hear from people who want to invest directly in private businesses is that they feel a wave of uncertainty. They have no idea where to start, which businesses they should invest in, and whether they have the nous for day-to-day or monthly investment management and monitoring. 

The reality is that we’re living in unprecedented times and both first-time and seasoned private equity investors will benefit from a guiding hand. After all, making smart investments can be daunting. 

To that end, we have provided a snapshot of four key things to keep in mind:

• Know the Difference Between Risk and Volatility: Risk is the measure for a permanent and total loss of capital, while volatility is the interim valuation with the ability to rise and fall. Look for options that provide low volatility by avoiding venture capital. Instead, focus on businesses that are established in the three to five-year range.
• Liquidity: Private equity is relatively illiquid, and you might not be able to pull back the capital if you need to, so look at your own needs over the next 12 months before diving in. For instance, if you want to buy a house and need the cash, you won’t necessarily be able to get your stake back immediately. Our advice is to avoid allocating your full capital into private equity. Ensure you have enough liquid cash and liquid asset classes in your portfolio.
• Macro-Economic Factors: These are generally out of your control, but it’s not unrealistic to consider the potential for labour unrest and commodity price fluctuations to put pressure on every industry in the country, which could therefore affect your investment. Our advice is to ensure that your investment pool is diversified so that your investments aren’t similar or in the same industry. Rather spread your risk over different industries, product types, services vs. manufacturing, etc.
• Partner Up! Doubt is normal and can be quite beneficial. That said, it’s best to back your doubt with a strong foundation of both capital and human capital in the form of a trusted partnership. This way, you can learn to produce tighter strategies that deliver results far beyond traditional returns. Ideally, you want to partner with a company that speaks your language, understands business and entrepreneurship, and has a reputation for going the extra mile in due diligence and investigating prospective investment opportunities. Additionally, the right partner should seek out funds that consist of both local private equity funds and international offshore funds. These offshore funds are administered according to international private equity standards and grow at a steady rate with low market volatility.

Is private equity for you? Would you like to find out? Call IFSA Private Equity or register for our Prosperity Sessions, where we discuss smart investing strategies and openly debate the sometimes “ugly truth” of what it takes to cultivate true prosperity. Register for our first IFSA Prosperity Session which will be held at 15:30 (CAT) on 10 February 2022 with Richard Mulholland, Founder and CEO of Missing Link.  DM/BM

Author: Frikkie van Loggerenberg, CEO of IFSA Private Equity