Overview of
Private Equity in
the Real Estate
Market
IRF Conference
20 August 2013
The Basics – A Generic PE Structure
Private Equity
Firm (General
Partner or GP)
Limited Partner or LP (Public Pension Funds,
Corporate Pension Funds, Insurance Companies,
High Net-Worth Individuals, Family Offices,
Endowments, Foundations, Sovereign Wealth Funds)
Ownership of
the Fund
Fund
Investment &
Management
Private Equity Fund (generally an LLP)
Fund
ownership of
portfolio
investments
Investment
Investment
Investment
Alignment between GP and LPs
• GPs and LPs are aligned as minimum watermark IRR for
LPs needs to be achieved before GP participates in the
carry
• Common carry split between LPs and GPs is 80/20, and
the common base fee is 2%, hence the PE jargon of “2
and 20”
• A preferred return or watermark IRR is usually
determined by the sector
• In African property, the watermark IRR ranges from 8 to
10%, depending on the type of real estate fund (income
vs development)
• LPs are also starting to take positions in GPs
Private Equity in South Africa
• South Africa’s Pension Funds Act was reformed in 2011, with key amendments to
Regulation 28 of the Act which sets out the allocation cap for various asset classes.
• South African pension funds can now invest up to 10% of their total assets in private
equity subject to limitations (an increase from previous allocation caps of 2.5%)
• Over the last year total PE funds under management increased by 10% to over R126.4
billion, but pension funds are slow on the uptake.1
• As at 2012, it is estimated that despite considerable GEPF investments, less than 1% of
South African pension fund assets under management (“AUM”) was invested in private
equity.2
1 South
2
African Venture Capital Association
E. Pickworth (2012) “Pension fund ‘missing out on private equity”, Business Day (South
Africa), 11 September 2012
Private Equity Concerns Allayed: Swensen and Markowitz
• Liquidity concern regarding PE is perhaps a red-herring in the context of pension
funds. It is relevant only when issues of short-term solvency are to be considered. Is
this a material consideration for pension funds, which have long-term liabilities and
thus logically should also be adopting long-term investment strategies?
• Other asset classes are not in fact nearly so illiquid as they may at first appear. There is
a thriving secondary market for private equity partnership interests. Property, certainly
prime property in a prime location, is always saleable.
• Property, as an “alternative” asset pre-dates quoted equities as an investment by at
least 2,000 years.
• Legally defined liquidity creates the ability to convert securities into cash at a
moment's notice is naïve and unsound. Many investors on Black Monday were unable
to sell even FTSE100 shares as the demand for dealing capacity simply overwhelmed
the system. Trading in large blocks of listed equities is not as liquid as imagined.
• There is a tendency among trustees and consultants alike to regard “illiquid” and
“alternative” assets as the same, and it seems followers of “alternative” assets might
be compared to the original protestants who brought about the Reformation.
Private Equity Funds looking for a home
GPs stockpiled with dry powder fuelling deal demand
Source: Bain and Company
Funds on the road and capital split by fund
type in 2012
Source: Bain and Company
PE versus other Asset Classes:
Developed Markets
Median returns for public pension funds by asset class, 10 year horizon IRR, June 2012
Note: Data based on review of public pension funds in North America and Europe
Source: Bain and Company
What Emerging
Market Investors
are saying…
Investors in Private Equity
LPs planning to begin or expand investment in Select Emerging Markets by
Institution Type
Source: Emerging Markets Private Equity Association LP Survey 2013
Investors in Private Equity – Views on Africa
• Sub-Saharan Africa for the first time leads a new tier of Emerging Markets, for
the first time, jumping from 5th place in 2012
• Displaced BRICs as most attractive
• First time In the EMPEA survey’s nine-year history, none of the BRIC markets
broke the top three.
The Attractiveness of Emerging Markets for GP Investment Over the Next 12 Months – LP Views
Overall Ranking
2013
2012
2011
Sub-Saharan Africa
1
5
7
Southeast Asia*
2
4
2=
Latin America (ex-Brazil)
3
1
4
China
4
3
2=
Turkey
5
7
6
Brazil
6
2
1
Central and Eastern Europe
7
10
8
Russia/CIS
8
8
10
India
9
6
5
Middle East and North Africa
10
9
9
*Classified as “Other Emerging Asia” in 2011 and 2012
Why we like
Africa...
Large consumer market
Home to more than 1 billion people
• Fast growing economies,
underpinned by domestic
consumption
• CAGR in consumption of 11.4%
over the next three years1
• Increased urbanisation, 47% of
Africans will live in cities by
20251
• Emerging middle class; 95% of
the market currently informal;
20% of the market to be formal
by 20302
1 dot = 100,000 people
1
Source: Market Decisions
2
United Nations Human Settlements Programme (UN-HABITAT)
BofA Merrill Lynch Global Research
Africa continues to rise
FDI has grown considerably over the last decade
• FDI in SSA has grown to 5.6% of world FDI over the past five years
• South Africa invested over US$ 800 million in SSA during 20121
1
Real Capital Analytics
Sub-Saharan Africa real GDP growth
%y/y
8
7
6
5
4
3
2
1
Source: STANLIB Research
20
14
20
13
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
19
80
-2
00
2
0
Sub-Saharan Africa percentage of World GDP
% of world GDP, PPP
2.6
2.4
2.2
2.0
1.8
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
Source: STANLIB Research
Private sector financial flows (net) to Sub-Saharan Africa
$ billion
25
20
15
10
5
0
-5
-10
-15
-20
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
Source: STANLIB Research
Sub-Saharan Africa: % of people living on less than $1.25
per day
% of population, PPP adjusted
60
55
50
45
40
2015
2010
2008
2005
2002
1999
1996
1993
1990
Source: STANLIB Research
Aspirational consumer market
RISING STRIVER PROFILE
- 27 year old father of 2
- Thriving taxi business
- Lives in city centre and has a car
- Most of income on household needs + a new smartphone + drink after work
Growing consumer expenditure
African
Property
Fundamentals…
Property demand outweighs supply
•
•
•
•
Massive retail shortage
Lack of higher grade quality office space
Deficiency of industrial space
Increasing need for warehousing and logistics centres as retailers enter the
markets
• Lack of good roads and public transportation creates demand for housing
near work locations
Property fundamentals are strong
An opportunity for further 3 million m2 of retail in Lagos
• Johannesburg: 4,200,000m2 formal retail &
3.6 million people
City
• Lagos: 42,000m2 formal retail & 10.2
million people
Lagos
Johannesburg
m² : people
> 1 m² per capita
0.005m² per capita
and if 1 person’s spending power in Johannesburg equals 4 people’s spending power in Lagos
City
m² : people
Johannesburg
>1m² per capita
Lagos
0.2m² per capita
This represents an opportunity to develop up to 3,000,000m2 of formal retail property in
Lagos.
Source: BofA Merrill Lynch Global Research, IMF, Euromonitor, SACSC, CIA Factbook
Formal retail undersupplied
Millions
Formal Retail Supply (size of bubble indicates sqm formal retail)
• Demand outweighs supply
making rentals expensive
Lagos
City Population
8.00
• Economic growth and
relative population
supportive
Johannesburg
4.00
Nairobi
Accra
Kampala
0.00
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
• 50 million people in
Nigeria live above the
poverty line
9.0%
Country GDP Growth 2012
Source: STANLIB, BofA Merrill Lynch Global Research, IMF, Euromonitor, SACSC, CIA Factbook
Sound underlying drivers of return
• Average Regional retail rentals / m²
• Lagos
$65 Nairobi
$31
• Accra
$45 Johannesburg $45
• Average High grade office rentals / m²
• Lagos
$85 Nairobi
$15
• Accra
$40 Johannesburg $20
• Average yields are in the region of 11 – 14%;
• Targeted IRR’s (10 year) are between 20 – 25%
• Good risk-adjusted returns
Source: Knight Frank, Africa Report 2013
STANLIB Research
Sell side analysts’ view for SHP
SHP Nigeria
• Currently 5 stores with
18,000m2
• A further 4 stores by end
2013 or 12,000m2
• SHP believes 700 stores
can open in Nigeria
• SHP has first mover
advantage
• No central distribution yet
• Competition limited with
95% of the market still
informal
Private Equity in Property Development: a different type
of investment
• Spend time on the ground walking the streets
• Develop partnerships with long term local developers
• Entrench in the economic environment
• Long – term sustainable, responsible investing
• Take time to understand how things work
Recognise the
Opportunities
but also
Recognise the
Risks
Opportunities are bright, but challenges remain
Africa clustered toward the bottom of global rankings
• The World Bank recognises
progress made by African
countries since its first listing in
2005
• African countries have a long way
to go
Long list of risks to be considered
• Buckets of Risk to Manage
Country
• Political risk
• Bribery and corruption
• Bleak international perception
Operating Environment
• Lack of infrastructure
• Credibility of partners
• Lack of available debt funding
Currency and Interest Rates
• Currency risk
• Rental payments in local currency
• Interest rate and tenor risk
Legal Environment
• Inefficient policies
• Tax risk
• Legal and contracting risks
Risks are real and have to be managed
Exercise even greater caution to ensure you are protected
Specifically related to Property:
• Land Tenure – need for local partnerships
• Ability to Execute – need for service provider partnerships
• Ease of distribution – need for retailer & investor/developer
partnerships
We need to take action
• Perspective:
assuming a glass-half-full perspective that focuses
first on opportunity, and only then on the risks that need to be managed
• Partnerships:
investing in building strong collaborative
partnerships across government, business and communities and with each
other
• Planning:
adopting careful long-term planning, and patience;
persistence and flexibility in implementing those plans
• People:
nurturing and developing Africa's human talent: arguably the
continent’s greatest resource
Embracing Africa’s diversity unlocks opportunities
Source
ERNST & YOUNG Business in Africa Survey
STANLIB Africa
Direct Property
Development
Fund
(“SADPDF”)
The Fund
1. Scope
Stage of development
Greenfield, brownfield, land acquisition, early development phase
Geographic focus
Sub Sahara Africa (excluding CMA), with a key focus on Nigeria, Ghana, Kenya, and Uganda
Property segment
Retail (60%-80%) and other commercial assets (20%-40%)
Project involvement
Land acquisition, concept design/management, project management (construction), portfolio
management (leasing, maintenance)
2. Role and Nature of Investments
Size range of investment
$15 - $ 30 million
Where in capital structure
Land owner (10-25%) / Fund equity (25-40%) / quasi equity (10-15%) / Senior debt (50-65%)
Targeted return profile
22-25% IRR (nominal gross)
Hurdle rate / Preferred return
10% IRR
Level of control
Varied, but select reserved matters for Fund at shareholder level
Maximum deal size
No more than 33% of the total Fund capital ($50 million)
Partnerships
Local institutions (land access), SA retailers, private equity funds (e.g. Actis)
3. Fund scale and Structure
Size
$150 million (4-6 projects)
Duration
4 year investment period, 4 year harvesting period (with a two year extension option)
Domicile
Mauritius
Co-investment allowed
Allowed for select investors
Minimum ticket size
$5 million
Fees charged
1.5% (25% discount charged to usual rate)
Disclaimer
Information and Content
The information and content (collectively 'information') provided herein are provided by STANLIB Asset Management
(“STANLIBAM”) as general information for information purposes only. STANLIB does not guarantee the suitability or
potential value of any information or particular investment source. Any information herein is not intended nor does it
constitute financial, tax, legal, investment, or other advice. Before making any decision or taking any action regarding
your finances, you should consult a qualified Financial Adviser. Nothing contained herein constitutes a solicitation,
recommendation, endorsement or offer by STANLIBAM.
Copyright
The information provided herein are the possession of STANLIBAM and are protected by copyright and intellectual
property laws. The information may not be reproduced or distributed without the explicit consent of STANLIBAM.
Disclaimer
STANLIB has taken care to ensure that all information provided herein is true and accurate. STANLIB will therefore not be
held responsible for any inaccuracies in the information herein. STANLIBAM shall not be responsible and disclaims all loss,
liability or expense of any nature whatsoever which may be attributable (directly, indirectly or consequentially) to the
use of the information provided.
STANLIB Asset Management Limited
Registration No: 1969/002753/06. A Financial Services Provider licensed under the Financial Advisory and Intermediary
Services Act, 37 of 2002. FSP license No: 719.