An analysis of the factors affecting and explaining the low private equity investment allocation of Zimbabwe's Asset Management Companies

Abstract

Zimbabwe’s asset management industry has a low asset allocation threshold on average of 3% towards private equity (PE) investments against international benchmarks threshold of 5- 10%. This suboptimal allocation towards PE is at a time when there is significant downward pressure on investment returns from the traditional assets and there are growing PE investments opportunities through the proliferation of small to medium enterprises in the economy. The purpose of this research was to determine the factors that affect private equity asset allocation of asset managers as well as to determine the benefits and drawbacks of PE investments when compared to traditional asset classes. In addition, the study also set out to assess the level of appetite for PE investments in the asset management industry. The study hypothesis was to test whether or not the PE class is an inferior class when compared to traditional investment asset classes given the current low level of participation. The theoretical framework highlighted that PE asset allocation decision is affected by liquidity preference factors, availability of PE opportunities in the market, investor circumstances, transparency and risk-return profile of PE investments. The empirical study through quantitative analysis indicated that of the hypothesised factors only risk-return profile of the asset class and investor circumstances explain the asset allocation decision of asset managers in Zimbabwe to the tune of 68.4%. A correlation analysis on the hypothesised factors and asset allocation decision indicated the existence of positive correlation between PE allocation, with transparency and liquidity preference status. The empirical study further indicated substantial interest in the PE class supported by the significant advantages from the asset class as identified in the study being long term returns, portfolio diversification and positive socio-economic impact. The research main hypothesis was rejected in light of survey results analysis. To improve the uptake of PE investments by asset managers it is recommended that the government operationalise the Small to Medium Enterprises Stock Exchange and make it mandatory for all PE investments to adopt the Zimbabwe’s National Code on Corporate Governance. These initiatives go a long way in reducing the risk profile of PE investments and possibly impact on the uptake of PE investments by Zimbabwe Asset Managers. In addition it is recommended that asset managers consider the PE class in their asset allocation to enhance clients’ long term returns and to diversify their investment portfolios.