How structure shapes returns in South Africa's private markets
“Does fund structure meaningfully influence performance, exit discipline, and long-term value?”
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By Lungi Gwente, corporate finance and mezzanine debt associate at Tamela
As South Africa’s private credit and mid-market investment ecosystem matures, investors are increasingly asking a fundamental question: “Does fund structure meaningfully influence performance, exit discipline, and long-term value?” The answer is yes, but not in a one-size-fits-all way. Both open-ended and closed-ended funds carry strengths and trade-offs, and the right choice depends squarely on an investor’s liquidity needs, return expectations, and risk appetite.
Closed-ended funds are structured with fixed life cycles, typically seven to 10 years, which naturally enforce exit discipline. Managers must plan, govern, and realise investments within a defined horizon. This structured approach has historically contributed to stronger long-term outcomes in South Africa’s private markets. The latest Southern African Venture Capital and Private Equity Association Private Equity Industry Survey shows that local private equity and mezzanine funds delivered a 10-year ZAR internal rate of return (IRR) of 12.4%, outperforming the JSE All Share Index over the same period – a performance driven in part by disciplined, time-bound exit cycles.
The trade-off, however, is reduced flexibility. If exit windows are weak near the end of a fund’s life, managers may face pressure to sell earlier than ideal. By contrast, open-ended funds allow redemptions at regular intervals, giving investors valuable liquidity. Yet this liquidity can create structural challenges when underlying assets are illiquid, as is often the case in private credit, mezzanine, and infrastructure-adjacent investments. Global regulators have flagged this dynamic: The International Organization of Securities Commissions 2023 Global Investment Funds Report notes that open-ended vehicles are particularly exposed to “liquidity stress amplification” during market volatility.
South Africa has experienced this firsthand. During the March 2020 Covid-19 disruption, the Financial Sector Conduct Authority (FSCA) recorded significant redemption pressure in domestic open-ended funds, prompting several managers to temporarily gate or reprice portfolios to protect investors.
These structural differences also shape performance measurement. In closed-ended funds, IRR is a meaningful indicator because capital is drawn down, deployed, and returned within a defined period. A major MSCI study found that closed-ended real estate funds produced median IRRs of 11.27%, capturing upside through timed exits, while open-ended funds delivered smoother time-weighted returns of 3-4%, reflecting their continuous inflows and outflows.
From a portfolio stability perspective, closed-ended funds are better insulated from redemption-driven selling and can remain invested through value-creation cycles. This matters in South Africa, where private assets are inherently illiquid and secondary markets are shallow. FSCA statistics show that between 2021 and 2023, open-ended fixed-income and multi-asset funds experienced over R150 billion ($8.9 billion) in net outflows, while alternative funds (largely closed-ended) maintained stable inflows.
So which structure is “best”? The truth is that it depends. Closed-ended funds suit investors seeking higher IRR potential, governance-intensive value creation, and comfort with illiquidity. Open-ended funds appeal to investors prioritising liquidity, smoother performance, and evergreen compounding.
Ultimately, fund structure drives manager behaviour and behaviour drives returns. For South Africa’s private markets, the right structure is the one that aligns most closely with an investor’s needs, horizon, and tolerance for illiquidity.
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