Private Equity For Public Impact

Few people are more familiar with the intricate and complex realities of “double bottom-line” investing than Elias Masilela. In his almost-four-year tenure as CEO of the US$140 billion South African Public Investment Corporation (PIC), the asset manager for Africa’s largest pension fund (GEPF), he not only grappled with the integration of investment goals and socioeconomic influence: he championed it on the global stage.

During a period when many of his international peers were taking a risk management-oriented and public equity-centric approach to Environmental, Social and Governance themes, Masilela was pioneering a more unconventional angle with impact and illiquid investments at the forefront.

Since he left the PIC in 2014, Masilela – now Chairman of DNA Economics and a member of Future Planet Capital’s investment advisory committee – has witnessed the continuing evolution of the global ESG investment debate, with impact investing moving from the fringe to the mainstream and pension funds around the world increasingly thinking of their private investment portfolios as catalysts for positive change. He recently sat down with Future Planet to discuss this timely topic.

 

 

Elias Masilela, Chairman of DNA Economics, speaking for the United Nations University World Institute for Development Economics Research (UNU-WIDER) on youtube.com.

Since the global financial crisis of 2008, private equity has clearly been in vogue with pension funds and sovereign wealth funds around the world, as evidenced by significantly greater allocations.

The basic rationale is straightforward: potentially greater returns and improved diversification. Yet there is also an interesting developmental pattern at play. Every economy in the world originally began as a ‘private equity’ economy, before the emergence of increasingly complex stock markets and wider financial markets took place. After an upheaval which revealed the fragility of that system, it was rather interesting to observe a return to older models of ownership.

For investors with an interest in or a commitment to sustainability, private equity represents a unique opportunity to exert a direct impact on the real economy and encourage the type of positive change that the investor wishes to see at a regional or global level. Areas of significant interest in this regard include  investments in health, transport, housing, education, communication and more. At PIC this was not just within South Africa but across the broader continent.

Private equity investors, by definition, possess a greater level of influence to bring about change in the livelihoods of people across the world. The same pattern is evident in Future Planet Capital’s investment philosophy and allocation.

In practice, however, private equity has not always proved to be well aligned with the principle of sustainability. The vehicles and managers tend to be relatively short-termist, with holding periods of four-to-seven years, while many pension funds have the ability to take a twenty- or even thirty-year outlook. To make matters more challenging, the industry has an undeniable and unenviable reputation for being primarily concerned with satisfying the greed of its actors – by maximising profits at all costs.

Fortunately, times are changing and changing rapidly. To this end, patient capital is increasingly becoming prominent in the private equity space, either in the form of direct investments or vehicles with longer-term structures. Developmental and sustainable private equity investing has moved from the fringe to the mainstream. Indeed, it is my conviction that these two terms can be used interchangeably: true ‘sustainable investing’ must, surely, encourage economic growth and  social development in some way.

Wider political changes have also, perhaps, placed greater emphasis on the role of pension funds in encouraging sustainable development.

The United Nations Sustainable Development Goals, with their shift in focus towards the private sector (of which pension funds represent a significant substantial part followed by sovereign wealth funds and to a smaller extent, family funds), represent an acknowledgement that governments have failed to deliver much-needed change on their own.

Today, the greatest risk to economic stability – and, by association, the achievement of investment objectives – lies in the continuation of the failure to deal with inequality. Economic inequality, poor growth, high unemployment, deep poverty and social instability pose dangers that conventional risk management frameworks find difficult to quantify, making them remarkably difficult to manage.

The more that investors find ways of blending their investment goals with impact objectives, the better our chances of addressing these fundamentally important challenges.