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This time around, our Operational Leader is Deon Smith, Product Director at Ninety One, the largest independent, active global asset manager in Africa. We sat down with Deon, who plays a leading role in building out and growing its alternative credit platform, to discuss the evolution of the firm’s private markets offering and how its African roots have shaped its development.
To begin, I should note that private markets aren’t particularly new to Ninety One; we actually entered the private markets arena in 2005. Given our strong emerging markets heritage and experience in Africa, including South African markets, this was the obvious starting point. At that time, Africa’s profile was accelerating globally – you may recall the ‘Africa Rising’ Time magazine cover in 2012 – and, as is the case with many emerging and frontier markets, private investment was the most effective first order tool to really tap this growth potential.
We effectively launched a private debt and a private equity offering throughout 2005, 2006 and 2008. Towards the end of 2008, the global financial crisis was producing some very attractive entry points for both the equity and debt markets, and we saw some good success there. Initially, it was a wholly organic entrance: looking at the market opportunity and finding a solution to this with a small and committed client base that has grown with us over the last 12-14 years.
Reinforcing this trajectory, we decided to expand beyond African Private Credit to a more global footprint. Our first fund launch is the European Credit Opportunities Fund, which focuses on the sponsorless European private mid-market space. The team has a fairly unique approach with a very much private equity-like style to underwriting the deals. What really excites us about this space is the ability to generate differentiated returns, core to our objective of best-in-class active asset management.
It’s played a huge role. We frequently highlight our roots as an emerging markets asset manager, having been born out of South Africa in 1991. It has served us well in both the public and private spaces because we have always had a focus on emerging markets – our EM debt capability, for instance, is a very large capability. Understanding how emerging markets work, having lived, breathed and grown up in them, provides you with unique viewpoints on how they function. Specifically, our heritage has enabled a resilience that helps us weather and navigate change.
As for our proximity to the rest of Africa. You’re always going to be an expert in your backyard, and African markets are really unique. In Africa, it’s unique in each country: how you repatriate funds, the political and geopolitical risk, the regulatory risk and broader transactional environment.
We go into every environment with our eyes wide open and we’ve learned lessons that we can carry through to other markets. With those lessons and the right investment personnel, we are excited about what we can offer. I think our public and private markets experience combined really positions us effectively going forward, especially in the transition funds arena, where we see a lot of focus around sustainable investment practices.
In 2021 we launched a private markets umbrella in Luxembourg, alongside our existing AIF and UCITS umbrellas. It’s a domicile which we’re very comfortable operating in. We like Luxembourg, and importantly, so do our clients. Our ambition is to grow this over the coming years as we continue to meet client needs in this space.
We chose the SCSP RAIF regime, which is in shorthand a typical LP / GP partnership structure under the RAIF law. This allows us to build up multiple compartments or funds within one structure in an attempt to build scalability, and it does appear to be bearing fruit.
As for the processes that we have been able to carry over or leverage from the public side, I would say very few processes. That being said, we run a predominantly outsourced middle- and back-office business with a strong in-house oversight function. Here, we’ve been able to see the benefits of our partnerships and tweaking of our public models, specifically in the fund accounting, custody and administration space. These are items we just can’t afford not to get right. Where we’ve seen less success in translating from public to private is on the transfer agency side – effectively where you keep your investor register and manage the cash flows. The complexity in onboarding clients, in comparison to public markets, is great. It’s a really rigorous legal process. We still struggle with that.
It’s early in the game to determine our success in executing our ambitions in the private market space, but I think some tangible successes we’ve had include working with the right partners. So, leveraging our partnerships where it counts most from an operational complexity perspective has been a big win.
We’ve also had early success on the fundraising front for what is a new investment strategy, which is by no means an easy accomplishment given the fact that this is a new vintage and we’re playing in geographies with large incumbent private markets players. I put this down to the differentiation of the product and the substance of the investment process built by the team, supported by the Ninety One platform and the investment risk and governance infrastructure.
Only time will really tell, but I also genuinely believe we settled on and implemented the most scalable fund structure we could. Private markets investment strategies are nuanced, and each requires a slightly different take on implementation. A ‘one size fits all’ strategy does simply not apply, but we have a stretchy elastic band and I believe we will be able to adapt as necessary.
Economy to scale is the first one. In private markets a scalable, automated and industrial operating model is harder to achieve. This is as a consequence of both the inefficiency of the market (which is the source of alpha) and the sorts of investor negotiations required in structures that demand long term multi-year horizons.
Investor onboarding and negotiations are also no mean feat. Whereas traditionally you tend to treat your investors as somewhat homogenous, there’s a huge heterogeneity in your sophisticated client base and unique requirements. So for instance, if you’re onboarding a DFI versus a retirement fund, the DFI is going to have a whole host of prerequisites around reporting and impact. Unique translates to complex, and complex isn’t automated easily.
If we had the luxury of time, I think we would have built this initiative out with a greater focus on technology. Many issues associated with scalability can be solved for with technology or by working with the right tech provider.
Technology offers huge opportunities, specifically in the areas that we have already mentioned, such as client onboarding, KYC & AML, client reporting, and importantly, client cash flow management. On the front-office side, systems are getting better, but here I think scale is a much greater consideration before it makes sense to implement. You really have to be at an inflection point; you probably have to be in the medium-to-mature business stage before you actually start implementing something in the front-office that makes sense from a unit economy perspective.
For a bit of context, we’re dual listed on LSE and the JSE and have a long history of being a global operator, working in the UK and EU and servicing significant client bases there and of course operating under those respective regulatory regimes. We are lucky in South Africa to be the incumbent; we’re the largest asset manager here and we deal with a large contingent of the investor base in South Africa, and there’s certainly a growing interest in private markets and how you access this. The South African Financial Services environment is a pretty sophisticated market and a highly regulated environment as a result of the sophistication, but market capacity is limited and this does require that we take some funds offshore.
As an example of the tight regulation, even certain UCITS can’t be sold in South Africa. Our regulator has a dim view on, for example, the use of derivatives in a UCITS fund and there is strong risk aversion within the South African context. Illiquids are also very far down the list insofar as opening up to South African investors. We are looking at ways to bring this to Southern African investors but we’re going to have to be very innovative on the product front to find something that meets both the regulators’ demands and that of investors.
I believe it is more the latter, although there tends to be less of a non-institutional investor base to target. To speak of our cousins in Botswana, they are promulgating a new regulation where they’re decreasing the amount of assets that pension funds can take offshore. They’re looking to bring back assets to Botswana, and as the market is only so deep, they will have to turn to private markets. We’re going to see a lot of developments and innovation there within a supportive regulatory environment to house a large proportion of assets coming back into the country, and we will be working alongside market participants there to develop that. As a result, private asset types will become more mainstream.
It’s a similar situation in Namibia too. In South Africa, we are also seeing that regulation has shifted and they’re getting more comfortable with the idea for pension funds to access illiquids in the form of private equity or private debt, in particular to fund infrastructure.
It is however still dependent on regulation. We always want to work in harmony with the regulators to ensure that, at the end of the day, the best interests of the investors are kept at the forefront.
I believe that private markets will continue to become more meaningful in investor allocations. However I don’t believe all asset classes within private markets will fare as well as others, given the changing interest rate environment. For instance, looking at LBO PE funds, they might struggle, compared to private debt funds, which might accelerate. The characteristics of private market investments will continue to track and it is ultimately diversification and the return profile that’s being sold that will attract capital. Other important considerations, which I touched on before, are the sustainability characteristics and the ability to affect change in invested companies. These tend to be intensified in private markets, which means impact and potential climate transition funds should thrive within the private markets space.
The depth of asset types within private markets will also continue to evolve and broaden – just look at the credit spectrum of what’s available now, compared to maybe ten or fifteen years ago. We may see a slow shift to more liquid solutions, whether that be hybrid open-ended funds or evergreen funds. As product evolution meets investor appetite, we see the DC pension market becoming more of a meaningful allocator to private assets. It’s just about how you package those ultimately for the end investor.