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SIMON BROWN: I’m chatting with Frikkie van Loggerenberg, CEO of IFSA Private Equity. Frikkie, I appreciate the time today. Alternative investments – they really have come a long way, I suppose, in the last couple of years but particularly in the last decade. They used to be really the preserve of very few, and now they’re much more widely available for the average investor.
FRIKKIE VAN LOGGERENBERG: Definitely. Simon, thank you so much for having a chat with me. It’s always nice. Alternative investments – in the last 20/30 years there has been this myth that alternatives, specifically private equity, are only reserved for your larger portfolios, pension funds, those types of things. But in recent years, I would say the last 10/15 years, there’s been a lot of work done more into the retail space and allowing investors to have a lot more access or easier access to these types of asset classes, which in my mind is brilliant.
SIMON BROWN: And when you are talking alternatives – your expertise is private equity – they often get a bad wrap and maybe this is because everyone remembers Edcon, where it was about an over a leveraged business, struggling to pay interest bills. I suppose it happens, but that’s not the proper logic behind it.
FRIKKIE VAN LOGGERENBERG: Definitely. In every industry, in every fund class , there are ups and downs and there are creative or interesting things that can happen. But out of a regulation perspective, I always say that in South Africa you know that we are very, very heavily regulated in the specific space. So it comes down to your asset manager, investment manager, the expertise that they bring to the table and experience they bring to the table. Obviously make sure that before you invest you go through the process, ask the questions and see that the diversified industries that you’re investing in talk to you, and make sure that everything is as it should be.
SIMON BROWN: That’s a great point because, if we look. there are different ways of doing it, and I think perhaps more popular is the idea of a private equity fund. It gives more diversification. It also perhaps gives a little less risk to any single asset. But it is a case of knowing what that specialty of the fund is.
FRIKKIE VAN LOGGERENBERG: Definitely. Look, it’s always a good investment principle to have a diversified portfolio and the alternatives. That gives you that little bit of edge, because if everything goes right, like it is usually supposed to do – if it just goes marginally right – there’s less volatility in your portfolio and you have equity-type returns. The negative that you have to watch out for is just to plan around the liquidity, because private equity is not listed on the exchange. So liquidating positions or portfolios is not as easy as in the listed environment. So if you plan for that, put that into your structure, your five-year or seven-year-plus type of building block and then [if] you access your private equity side, that gives you a very nice run on your portfolio.
SIMON BROWN: That’s a good point in terms of liquidity, because I could sell my entire JSE portfolio while we are having this conversation; but that’s not the case in private equity. You’ve got to give it that time to mature. You’ve got to give it that time and understand that the exit on the other side isn’t just a click of a mouse button.
FRIKKIE VAN LOGGERENBERG: A hundred percent. I think that’s the perception that has to be really instilled. That’s what I like about the last couple of years. Specifically coming through, you’ve got a couple of bloggers, YouTubers, experts like yourself, talking around investment principles and basics. And the more and more the information is readily available out there people get comfortable around this specific asset class and understand what the liquidity constraints are.
But what is the risk-reward type of it, what is the reward side of it? Why do you want to go that [route] and how does it fit into your portfolio? It’s actually very exciting times, specifically now with our political situation and the economy looks like it’s starting to turn.
SIMON BROWN: I can say there’s always opportunity out there, but perhaps there’s even better opportunity out there right now in current circumstances.
FRIKKIE VAN LOGGERENBERG: Definitely. We always say wherever there’s a problem, there is an opportunity to fix it. It’s not to say that we’ve got massive, massive problems, but there are some challenges in South Africa. In my opinion there’s a lot of opportunity to fix these challenges and, if you do your homework correctly, with a bit of luck and a bit of skill you can get to where you want to be.
SIMON BROWN: And that skill’s important. I remember a conversation with you a couple of years ago where we were talking about what private equity brings to the table. Now it brings cash. That’s important, make no mistake about it. But it’s if you can bring skills to it as well, because a lot of these companies are not necessarily struggling. They’re moving on to the next leg of growth and they need certain skills they currently don’t have – and the PE managers can bring those in.
FRIKKIE VAN LOGGERENBERG: Spot on. Simon, I’m glad you can remember that far. So now one of the important things that I think private equity actually brings to the foreground, to the table, is we’ve seen a heck of a lot of businesses, entrepreneurs, that have got super skills. They are wonderful at what they do in their business day-to-day. But they have a challenge when it comes to the financial management side. Sometimes they just need an objective opinion to help them go through their process, do proper cash management, proper balance-sheet reconstruction; they need that expertise.
And when it comes to private equity, what we do is we take a look at where we can actually add value on top of the cash. The cash is necessary but you need to add value to that specific business and see if you can take it from a R1 business to a R5 business and everything in between.
SIMON BROWN: And that’s I suppose it. The other point is that a lot of times we think that maybe private equity is saving a failing business, and that may be the case, but I suspect more often it’s about boosting a growing business.
FRIKKIE VAN LOGGERENBERG: Hundred percent. Look, there’s opportunity in businesses that are a little bit tightly wound, but 99% of the time you identify a very good business – you can see that if you add this value, you’ve got this expertise that you can implement, and see what’s the next step going on there – that is where the core focus of private equity is. So it’s a lot like cherry-picking because you go through a hundred potential businesses or strategies or opportunities, and you maybe pick one. Then you just give that 100% of the focus, get on the board, do the budget, see exactly what you can do with your marketing and sales, and actually try to add that value to that business.
SIMON BROWN: And of course that’s an important point you’re picking. You’ve got that luxury of choosing.
We’ll leave it there. Frikkie van Loggerenberg, CEO of IFSA Private Equity, I appreciate the time.
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