Private Equity – To Be or Not to Be?

Feel free to reach out to PSG Wealth Adviser  Deon van Zyl directly.

As financial advisers, we often face a similar kind of uncertainty from clients asking about private equity investment funds. These opportunities are often presented with dazzling marketing, promising unbelievable performance and ‘fail-proof’ business models. They sound too good to be true – and often are.

In recent years, South African investors have seen names like Sharemax, Ecsponent, and most recently, Kleuterzone, enter the private equity scene with great promise. Sadly, none of these companies exist today – and billions of rand have been lost.

The recurring question is:

Why do these companies fail, and why don’t investors see the risks?

Well, ask ChatGPT, and the pitfalls of private equity come up quickly:

1. Illiquidity – You often cannot access your money when you need it.
2. Lack of transparency – You may not truly know how the business is doing.
3. High fees and risk of underperformance – Returns are not guaranteed.
4. Economic and market risks – External factors can crush even great ideas.
5. Limited control – Investors have little to no say in operations.
6. Valuation and exit risks – Getting your money out at a fair value can be nearly impossible.

These are obvious in theory. But in practice, investors get swept up in the dream, not the risk.

A personal perspective

Let me share a real-world example. During the Covid period, I helped set up a small petroleum distribution business. I saw an opportunity, borrowed money, and joined two other shareholders to start operations.

For the first six months, things went incredibly well. Then reality hit:

• We lost our original site due to permit issues.
• We had to relocate, and the associated costs nearly wiped us out.
• A new competitor opened 500 metres away, undercutting our price.
• One shareholder covered expenses for three months – without that, we would have gone under.
• Clients delayed payments, and we could not meet our promised investor obligations.

At least three times, we could have gone bankrupt. It took four full years of sweat, sleepless nights, and some lucky breaks before we could say we had a going concern. To date, our shareholder investors have received just 30% of their original capital back in monthly payments.

That is four years of uncertainty for a partial return – and we are one of the lucky ones.

The problem with the private equity dream

The greatest danger with private equity is the illusion of certainty. Business plans set out in Excel always look brilliant. But reality does not live in spreadsheets. It lives in the unpredictable – permits, competitors, cash flow gaps, inflation, and more.

Most investors simply do not understand how difficult it is to build a sustainable business, especially one that can provide consistent returns over time. Yet these are the very businesses being offered as ‘safe’ investment vehicles.

This is why I firmly believe private equity investments are not suitable for retirement savings.

Retirement money needs:

• Diversification
• Liquidity
• Reliable, inflation-beating growth
• Regulated, transparent structures

This is why my own investments and retirement savings are managed by PSG Wealth Pretoria East, through diversified fund-of-fund structures with exposure to listed businesses with proven track records.

Conclusion

Private equity may have its place for high-risk, high-net-worth investors who fully understand the downside. But for the average investor – especially those investing their hard-earned retirement savings – private equity is, quite simply, NOT to be.