Private equity is one the most important alternative asset classes, and a growing proportion of investors consider private equity to be an essential part of their investment portfolios

At a high level, private equity is the term given to an asset class which consists of investments in the equity shares of unlisted companies (companies whose shares are not listed on a public stock exchange).
Many institutional investors argue that private equity is one the most important alternative asset classes, and a growing proportion of investors consider private equity to be an essential part of their investment portfolios. Private equity is able to generate significant returns, often well in excess of the public equity returns, and therefore offers an attractive opportunity.

Diversification of an investment portfolio and a greater return relative to other asset classes, are among the most important reasons for investing into private equity, as well as obtaining a positive annual return.

There are risks associated with private equity investments, however, such as the risk of default, illiquidity (often as a result of high gearing) and corporate governance. Therefore, risk reduction is crucial, and this is achieved by ensuring that a large number of investments are made, which are diversified across a wide spectrum of industries and resources, and working closely together with advisors.

In the late 20th century, private equity was typically managed, structured and financed by the major financial institutions in SA through their investment and merchant banking divisions. More recently, the private equity industry in SA has developed into one of the most sophisticated in emerging market economies, with many funds being invested in by international investors.

There are two types of private equity firms in SA: those who use money from within their institutions (on balance sheet financing, most prevalent in merchant banks, known as “captives”) and independant private equity firms who raise their own capital from lending partners, where investors assign private equity fund managers to invest their money on their behalf (funds under management).