There were indications of private equity fund growth in South Africa as the asset class started making its mark and proving its worth for potential investors.

Private equity funds still remained a small part of the world’s asset classes, accounting for only $3.5-trillion of the $164.1-trillion in funds under management globally.

However, advisory firm KPMG said that, with private equity funds enabling attractive financial and developmental returns, government, pension and endowment funds and banks, besides others, had started investing in the funds that showed ten-year returns in the private-equity market averaging around 19.1%, above the 18% returns of the JSE All Share Index.

Speaking at a Southern African Venture Capital and Private Equity Association (Savca) and Gordon Institute of Business Science foundation programme for private equity, KPMG private-equity partner Warren Watkins said on Wednesday that private equity was now “well established” as an equity class after proving its worth and was now growing.

He noted that global pension funds, which made up about $38.1-trillion, were steadily heightening interest in private equity activity, with around 4% of its funds allocated to private equity, with South Africa, with about 1% private equity allocation, following suit as attractive low-risk returns of up to 20% were shown over a five-to-seven-year period.

This was evident in government’s investment arm, the Public Investment Cooperation’s (PIC’s), increasing investment into the private-equity investment sector, representing, for the first time, the largest chunk of funds currently under the management of private-equity fund managers in the latest 2014 Venture Capital and Private Equity Industry Performance Survey.

The KPMG and Savca survey, released last month, showed 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 had upped their game in the sector, with the survey reporting that the Captives-Government category, which included the PIC, the Industrial Development Corporation and the Development Bank of Southern Africa, now accounted 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.

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.

“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 characteristics that tend to accompany private-equity investment,” the survey noted.

Black economic-empowerment (BEE) initiatives were also increasingly riding the private-equity wave, with BEE investments boasting a significant portion of the investment activity in South Africa.

Just under R150-billion of the funds under management in 2014 was owned by black-owned fund managers (50% or more black-owned), which accounted for R9.7-billion, black empowered (25% to 50% black-owned), which held R30.4-billion, or black-influenced (5% to 25%), with R38.2-billion.

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, while BEE investments increased from 236 in 2013 to 267 during 2014.

“Many of the private-equity transactions today have a BEE component to their structure, which assists in facilitating BEE shareholdings,” Savca CEO Erika van der Merwe said at the release of the survey in June, adding that employment equity with private equity funds was also a significant consideration, with an increase of 21% in black staff members from 2013 to 2014.

Meanwhile, the private equity industry in South Africa was expected to continue its steady upward trend, with the fourth quarter RisCura-Savca Performance report predicting that private equity would continue to improve on its internal rates of return.

Further, with billion of rands in capital available for deployment, an uptick in private equity dealmaking was expected in 2015.

Watkins said that, currently, R54.9-billion of the R171.1-billion in funds under management was yet-to-be-deployed undrawn commitments.

With the addition of management buy-ins, gearing and BEE considerations, this could increase to well over R150-billion of capital in search of ventures in South Africa at the moment.