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Amendments to IFRS 10 opens way for easier pension funds investment in private equity.

Johannesburg, December 2012 - Amendments to the International Financial Reporting Standards (IFRS) 10 Consolidated Financial Statements will open the way for South African pension funds, to broaden their investment horizons into potentially higher performing instruments within the private equity sphere. These amendments will take effect from 1 January 2013 and further amendments effective 1 January 2014, says professional services firm Deloitte. Early adoption of these amendments is also an option.

The original IFRS 10 accounting standard set out rules for the presentation and preparation of consolidated financial statements for entities that control one or more other entities. This had particular implications for private equity companies that, because of the diversified nature of their investments in companies, found it difficult and impractical to reflect the value of their investments in controlled entities using existing consolidation practices. They were therefore required when seeking potential investors from the pensions sector, to ‘not take control’ of the entities they invested in, says Dinesh Munu, a partner at Deloitte and Head of Funds and Asset Management with the firm’s financial services team.

“The newly amended IFRS 10 standard removes this stumbling block. As long as the definition of an investment entity is met, the requirement to consolidate financial statements is no longer required. Pension funds which are subject to a number of FSB regulations, and primarily Regulation 28, were also, until recently, entitled to invest a maximum of only 2.5% of their available funds into a hedge fund or private equity fund.”

“This has now been increased to 10% for private equity and another 10% for venture capital and hedge funds. So, the way has been opened for South African pension funds to openly and meaningfully invest in private equity,” says Munu.

The ‘knock-on effect’ of the reporting change for private equity companies was that with potentially new capital inflow streams opening up, more companies could look to increasing investments in Private Equity Investing, says Munu. Already, he says, one major local private equity company has already announced its intention to begin the process of doubling their investment platform.

“Pension fund spend in private equity can be expected to expand considerably as the IFRS change and Financial Service Board regulations have made these investments considerably easier to undertake. Another positive is that the FSB has informed private equity funds that if they wish to attract pension fund monies, they will have to abide by the FSB rules and IFRS regulations.”
“Many private equity funds, because of the IFRS 10 issues, were not preparing their financial statements to IFRS standards. They were simply using other frameworks that did not require the consolidation of the statements.”

“The way is therefore open for them to adopt the streamlined, easy to apply amended IFRS 10 standard and subsequent amendments and meet other FSB requirements if they wish to attract pension fund investments.”

Amongst the additional FSB requirements for private equity funds are:

  • Compliance with IFRS
  • Undertaking regular scrip counts to prove ownership of shares;
  • Compilation of audited annual financial statements;
  • Compliance with section 13B requirements.

The advantage of this class of investment for pension funds is that they could increase their returns for members by identifying and making use of the additional ‘skills sets’ available within the private equity sphere.

“The nature of private equity investments in predominantly unlisted entities means that over periods of about  five to six years, pension funds, by correctly identifying opportunities in partnership with private equity funds, could look forward to generating higher returns for members than those made by other investment streams,” says Munu.

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