Abstract:
The revised Regulation 28 of section 36 of the South African Pension Fund Act (no 24 of 1956) explicitly allowed and increased the maximum allowed private equity for a South
African pension funds from 2.5% to 10%, effective 1 July 2011 (National Treasury, 2011).
Four years later, there has not been a meaningful increase of private equity exposure in
the South African (SA) pension funds (KPMG & SAVCA, 2015). In contrast, when
Regulation 28 was revised in 2011 to increase the maximum allowed allocation to global
assets in SA pension funds from 15% to 25%, most pension fund key decision makers
were quick to increase and maximise their strategic and tactical allocations to global
assets, respectively. Bradfield and Munro (2011) also quantitatively confirmed that global
equities and bonds introduced significant diversification benefits to SA pension funds.
The main objective of this study was to quantitatively determine whether SA private
equity fund of funds introduces significant diversification benefits to SA pension funds.
Diversification was broken into upside potential, downside risk, downside-risk adjusted
and pairwise returns association. The secondary objective was to qualitatively assess
whether SA pension fund managers were objectively assessing private equity. These
included illiquidity risk, minimum investments and depth of private equity research.
The quantitative research methodology used quarterly asset allocation and returns data
from nine asset classes. A control strategic portfolio and ten other strategic portfolios
with increasing levels of private equity exposure were constructed. These portfolios were
then tested for statistical evidence of improved diversification. A qualitative approach in
form of exploratory, 15 semi-structured interviews was used to contextualise the
quantitative results.
The quantitative results showed statistical evidence that SA private equity has better
pair-wise diversification properties than SA listed equities and SA property relative to the
asset classes in a typical SA pension fund. However, there was no statistical evidence
suggesting that 10% allocation to SA private equity fund of funds results in increased
diversification for a SA pension fund. The qualitative findings showed that lack of
investment into private equity by SA pension fund managers has not been based on
objective assessments of private equity
