Futuregrowth Asset Management’s Development Equity Fund celebrates 10 years of outstanding results. Since the fund was launched in 2006, its 18.35% per annum return has significantly outperformed its benchmark performance of 16.3% per annum. The fund specialises in equity and related investments in socially responsible projects and businesses or development assets. David O’Sullivan spoke to Sarah de Villiers, investment analyst at Futuregrowth about the Development Equity Fund.
This interview is sponsored by Futuregrowth. Sarah, explain to us what the Development Equity Fund is.
The Development Equity Fund is Futuregrowth’s flagship private equity fund that has a specific focus on the developmental and impact investing.
Why that particular focus?
Developmental investing is really close to our heart, it’s what has differentiated Futuregrowth from other asset managers, and we’ve actually been the pioneers in starting development impacting as long ago as 20 years ago.
Give me some examples of projects that you invest in.
We have some amazing projects and I’ll just perhaps touch on one or two that are really close to me. I think the first is TUHF, which stands for the Trust for Urban Housing Finance. That has a twin focus in terms of, it provides finance to entrepreneurs to become property owners and those are people who wouldn’t normally be able to have access to funding and its secondary thing is, in providing this finance it actually is creating affordable housing in downtown Johannesburg.
Often these kinds of projects are seen as almost CSI projects for companies, not projects that one would invest in and get a return, how have you spotted the gap here?
That’s’ really interesting. What we’ve taken on board is that you don’t have to compromise commercial returns for a developmental impact and we can actually find businesses, whose focus and heart in doing development impact and yet they can deliver strong commercial returns. We identify those businesses that are doing the right things and also are investable.
Eskom gives Futuregrowth a red card as it withdraws its R100 million Provident fund investment in2 Futuregrowth's Development Equity Fund
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Do you find that other funds are wary of investing in development projects because they don’t see an obvious return because it has a developmental aspect, there’s a feel good attitude that doesn’t really square with good returns on investment?
Futuregrowth is very strong on sustainable and responsible investing and it’s come out of our ability to see businesses that have been doing well and yet have had a need for capital. In a way our fund was born out of this recognition of this sweet spot and that there are pension and provident funds who actually do want to invest in this space to have a positive impact and yet generate a good return for the pensioners.
You’ve spelt out the uniqueness of the fund, is there anything else for you that makes the Development Equity Fund unique, that makes it stand out?
I think first of all this is an open-ended fund compared to what is typically closed-ended private equity funds in the industry. That means that we aren’t forced to make an exit on a short timeframe and that we can actually take as much time as we need to deliver our impact investing on the ground through our investments. The second thing is that our fund, because it is not closed-ended, it actually has built up a very good diversity. We have over 44 different investments and that actually balances out the risk profile of the fund.
How do you decide where to put your money?
We have quite a robust team with just short of 40 investment professionals and we have the dual pipeline that comes from our connections in the market, but we are also known for our impact investing. Deals come to us and then we basically put it through our due diligence process and we are able to turn around investment deals.
Do you tend to go with people with whom you’ve invested in the past that have new projects; do you look to see that you have history with them?
Yes, we certainly do. Much of our work goes around who we partner with. We believe that is one of the most fundamental tenants of investing, who you’re partnering with. We don’t have the capacity to run businesses, so we look as to who we are investing our money with and we make sure that all the governance processes around that are maintained. Otherwise we look to our partners to make the investments grow and to deliver the impact.
Just learned some valuable stuff about investing in property! Thanks TUHF, TPN and Century Property Development #FundEX2016
— Jenny Retief (@zajenny) November 16, 2016
Are there any other investment criteria?
One of the questions we get often is how big an investment will we do and we actually don’t have a limit on that. We are willing as a team if we have an investment that comes to that that has a great heart and soul and it’s only R10mn we will look at that because we actually are motivated by the work that we do in terms of delivering socially responsible and impact investing. The only real limit is on the upside, is that we don’t’ want to take control of a business. We are actually looking to our partners to be the ones who are in control and are the shareholders of reference.
That means there’s a good relationship of trust between the two then?
Absolutely and most of our discussions at our investment committees are very robust around who these partners are.
How has the Development Equity Fund performed?
The fund’s performed very well. Over the past ten years (the fund was created in September 2006), we’ve delivered over 18 percent per annum, which is ahead of our rather austere benchmark of CPI plus ten percent benchmark, (that is inflation plus ten percent is our benchmark that we are trying to deliver against) and just by way of comparison, if you’d put your money into the All Share you would have earned your return of 12 percent over that same period. So we’re very proud of the fund’s performance and strongly showing that you don’t have to compromise commercial returns for your developmental impact.
Are you confident that you can maintain that kind of performance in tough economic times?
I think because the fund is diversified, there is a lot of mitigants in terms of performance. We have some more stable, later stage of life assets and then we obviously have the sweet, high growth, slightly earlier life stage assets, so it’s a long game. We don’t look necessarily to one-year performance, we realise that they will be impacted by the microenvironment, but over the long-term we feel that if you can actually get the fundamentals in place, that you can actually be doing your sustainable responsible, good governance and developmental investing and the model is right, we see no reason for this performance not to continue.
Do you target specific sectors to invest in; are there sectors you would avoid, for example?
Well, yes we do have sectors that we won’t look at and I think that goes to Futuregrowth’s philosophy on doing no harm, but this fund in particular, in its mandate has a focus on infrastructure and development and social upliftment and we are in roughly, I would say about 12 different sectors. For instance, we are in the renewable energies, education, healthcare, and then obviously the infrastructure is a big component of the fund.
Who can invest in this fund?
This is an institutional product; it’s not available to the retail market, in other words the man in the street. So even though it is a unitised fund like a unit trust, it’s for pension funds to be able to invest in this product.
Tell us a little bit about the Futuregrowth team.
Futuregrowth has an investment team of roughly 40 investment professionals and the focus of Futuregrowth is really that of a debt house. We have R170-bn in assets under management and the developmental aspect is only a portion of that. This fund itself is R2.5bn. We work together as a team and we leverage off our pipeline and our expertise across sectors, so there’s a lot of teamwork, a lot of collective wisdom that goes into structuring, analysing, and giving input on various deals, but I think at the heart of Futuregrowth is this desire to make a positive impact and that’s seen across in our personal activities that we do and our desire to see the good implemented.