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Most South African ultra-high-net-worth individuals have already shifted the bulk of their assets offshore.

South African investors’ appetite for private debt and equity is growing.

Westbrooke Alternative Asset Management, a fund house that cut its teeth in the now-defunct section 12J venture capital market, is an example of a company benefiting from this trend. The house is punting private debt investments, and its UK private debt fund is also delivering appealing yields.

‘Our senior secured UK private debt fund, Westbrooke Yield Plus, is generating a net yield of over 9% in pounds,’ Dino Zuccollo, head of investor solutions at Westbrooke, told Citywire South Africa. ‘It compares with the South Africa-based Westbrooke Income fund that yields 13% in rand.’

Around a month and a half ago, Zuccollo surveyed 100 South African wealth managers and found that around 70% are now allocating funds to private debt. Almost 60% of those surveyed indicated that a ‘lack of [return] correlation to local markets’ is ‘an important factor’ in their allocation decision.

It shouldn’t come as a surprise, though, as Zuccollo (pictured below) said most South African ultra-high-net-worth individuals have already shifted the bulk of their assets offshore.

‘The risk in the first world is lower than the risk in South Africa, especially with what is going on here in terms of elections, load shedding and so on,’ he said. ‘Why the UK? I think South Africans are familiar with the UK. Most [of the high-net-worth] South Africans have physically travelled to the UK. It’s a market they understand; it’s a culture they understand.’

So why opt for private debt?
‘It’s just an interesting ecosystem,’ Zuccollo said. ‘Long-term private equity returns in the UK have been in the mid-teens. But to achieve those returns, you need to be in the riskiest part of the business: equity. You need to be invested for up to 10 years and take material capital loss risks.’

Investors can earn multiples of what British banks offer on savings or money market accounts depending on the private credit supplier.

‘I can put my money in a six-month fixed deposit and maybe earn 4.5% or 5%,’ Zuccollo said. ‘I can put myself in private equity and run the risk, especially in a high interest rate, high inflation environment and lose that money.’

The alternative is to choose private debt with a smaller chance of ‘material capital loss risk’, and an investor ‘can get a return that is beating inflation substantially’, Zuccollo said. ‘That is close to private equity returns with much less risk.’

But why is there a worldwide shift where businesses opt for private rather than bank debt?

‘Interest rates being high is a key reason,’ says Zuccollo. ‘Our returns haven’t gone up in terms of the spread relative to cash. It’s the same. Three or four years ago, we were earning 4.5%, but cash was [yielding] zero. We are still earning 4.5% above cash; it’s just that cash in the UK is now [yielding] 5.25%.’

On the investor side, the supply of private debt is driven by high interest rates and ‘high absolute value returns’, according to him.

On the other hand, demand for private debt is largely driven by onerous banking regulations implemented after the 2008 financial crash.

‘Basel in 2008 has turned the banks into pretty large moving machines that can only deal with a certain level of complexity,’ Zuccollo said. ‘It has left a big gap in the market for smaller players to move with speed and deal with complexity better.’

In addition, Navin Lala (pictured below), client director at Old Mutual Alternatives Investments, sees market forces, especially in South Africa, as another reason for the surge in the supply of private debt.

‘There’s this massive compression in yield in your listed debt,’ he said. ‘That’s why you’ve seen investors looking more and more at private debt.’

Lala explained that different corporate issuers in the listed debt space increasingly see the margins at which they can borrow compressing. Not all investors are comfortable with the decreasing yields for risk profiles staying the same.

‘In the private debt space, your payoff profile has remained lucrative in terms of you’re getting the right amount of reward for the level of risk you’re assuming.’

Source: CityWire

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