Alternative investment returns knock the JSE out of the park

Given the flaccid returns from JSE stocks over the last decade, it’s little wonder that yield-hungry investors are scouting an incredibly rich landscape of alternative investments yielding 20% or more a year.

There were some astonishing products on display at the Alternative Investment Conference last week. They included private equity, hedge funds, cryptos, structured products, venture capital and 12J investment funds.

One of the problems with traditional private equity – investing in the non-listed space – is lack of liquidity. Investors only get a return once the investment is exited after five or seven years.

Sasfin’s new venture Scott Street One has solved this by creating a secondary market for pre-existing private equity investments, and is currently raising R750 million with a target return of more than 15%.

Developments like this could unlock huge amounts of capital for otherwise neglected though promising companies.

There has been some criticism of 12J investment funds for delivering below-par returns, but that’s certainly not the case for Infinity Anchor Fund, whose Infinity Performance Fund was the top performing fund in its class for the last year with an annual return of 15%. “We invest in asset rental businesses that have asset backing and regular rentals. The risk is low and this allows a clear exit strategy,” said Gaurav Nair, the company’s CEO.

Read: Understanding the benefits – and risks – of alternative investments

Reka Borole and Ross Tasker of Khulisa Investment Partners pointed to the yield-rich opportunities lurking in 12J and structured finance products (sometimes wrapped in options to protect capital or sweeten returns) offering internal rates of return of up to 25%.

It is returns like these that that are capturing the attention of serious investors around the world.

“SMEs [small and medium-sized enterprises] in SA lag those in Europe due to lack of funding, and the effect is to lower employment and contribution to GDP,” said Tasker. “With strategic advice, the economy can have an entirely different trajectory.”

SMEs finally get some love from investors

There’s a swarm of companies now pouring money into SMEs, perhaps the most neglected segment of the SA economy.

“SMEs are the engine room of the economy and generate the most GDP, but only thrive when investors make liquidity available,” said Stephen Greenwood of Valloop Management. “Alternatives [investment] will dominate the investment space, and it will drive the need for product with a blending of risk and return.”

Valloop has solved the SME funding drought by providing a single portal for the types of debt typically required to grow a business: asset finance, working capital, private equity and vanilla debt.

Traditional sources of funding can cripple an SME with interest costs. They may pay 10% on private debt, 7.5% on asset finance, and 6.5% on real estate finance. Valloop starts generating a return on its various financing products as soon as the deal is concluded. This means it earns fixed annual income of about 3.5% and annual capital growth on about 16% – a total annual return of close to 20%.

This investment approach also eliminates the need to exit an investment after five years. As long as the returns are coming in, the fund can elect to stay invested for the long term. Workers are given a share in the business to align corporate goals with that of management and owners.

Read: Alternative investments can ward off lacklustre portfolio returns

It’s a similar story at Aurik Capital, which has found a way to connect investors with SMEs in search of growth capital. It targets SMEs with turnover ranging from R12 million to R300 million, a good growth story and seasoned entrepreneurs.

“We have a pipeline of about 338 SMEs that have grown 28.9% annually in revenue, though this will likely drop to 25% post-Covid,” said Pavlo Phitidis of Aurik Capital. “Most of our businesses are not start-ups. They have a history of more than 17 years and are growing. SMEs have trouble accessing capital for growth, and investors are unable to tap into this market.”

Businesses can sign up online with Aurik and load up business information for assessment. If successful, they are put on a growth programme to make them investment-ready.

Targeting bigger SMEs

Caleo Private Equity takes a slightly different approach, targeting companies with turnover of between R20 million and R200 million. The fund looks for growing companies capable of either dominating their sector or being purchased by another player.

“Our investor base is made up people who built their own businesses and have good networks to other opportunities,” said Caleo director Glen Scorgie. “We have an aversion to funds which have a finite life – this means you’re selling because the fund is coming to the end of its life. This may not be the best time to sell.”

All private equity fund managers take an active role in the development of the investee companies, and bring their networks and capital to bear to get the best out of their investments.

The rise of hedge funds

Some hedge funds have delivered returns of 100% and even 200% during the year of Covid, and while these are exceptional, fund managers have found a ready ear from investors on the hunt for yield at a time of extraordinary volatility.

According to Jacques Conradie, MD of Peregrine Capital, the ability of hedge funds to adopt a bi-directional approach (profiting from rising as well as falling stock values) has helped these funds withstand the whiplash of the last few months. “A bi-directional investment strategy means we can back expected winners and bet against losers. In this year it was especially important to protect capital,” he said.

Long short list

“When did you last see a short list this long?” asked 36One fund manager Cy Jacobs, pointing to the trove of opportunities for hedge fund managers to profit from JSE companies that have tanked over the last five years, such as Steinhoff, Brait and Nampak. Previously only available to institutions and the wealthy, retail investors can now get involved through unit trust-type funds offered by 36One and others.

“We delivered a positive return when the rest of the market was falling, through the strategies we can apply; R1 million invested with us in 2005 would have given you R8 million today,” said Jacobs.

Hedge funds cover a broad range of investment appetites. Some are very low risk, others quite aggressive. Some are highly geared, others have no gearing at all.

Given erratic returns on the JSE and declining bond yields, competition for investment capital will inevitably circle around to alternatives that can protect capital, outperform benchmarks and beat inflation. And there were plenty of those on display last week at the Alternative Investment Conference.

Listen to Nompu Siziba’s interview with SV Capital co-founder and CEO Ayanda Majola: