South African listed private equity index

ENGLISH ABSTRACT: Private equity has been dominating the news recently both as an asset class and a tool to facilitate market efficiency in South Africa. Many private equity funds have had good returns in recent times. However, many pension funds still shun away from this asset class, mainly due to lack of understanding of the risk inherent in this asset class, and in its potential overall risk diversifying characteristics. Regulation 28 of the Pension Fund Act, prescribes maximum allocation of five percent to unlisted assets and that includes private equity as an asset class. One of the reasons why investors don't understand this asset class is the lack of comparable data relative to the listed asset classes such as listed equities and listed bonds. From these asset classes, people get data on a daily basis and they are able to understand the daily prices and values of their portfolio. They can also try to value the individual stocks within their portfolio by using variables such as price earnings ratio and dividend yields, as that information is freely available. This research tries to use the listed private equity companies to establish a Private Equity Index. The criteria used are the same as the ones used by Bilo, Christophers, Degosciu and Zimmennann (2004) when they created a Listed Private Equity Index (LPE), which is made up of 114 global listed private equity companies mainly from Europe and North America. The South African Index was created from six companies, and even though the sample looks small, the results were good enough to justify further studies on the same line and to encourage more listings of these types of companies. The Index was then analysed using modem portfolio analysis and optimisation tools to understand the risk and return characteristics of this asset class and how it behaves when blended with other asset classes. The results suggest that this asset class is under allocated and there is a need to create a more representable index even on an IRR basis.