South Africa’s sophisticated investors are increasingly turning from traditional listed markets to alternatives, supporting Westbrooke Alternative Asset Management’s new *WDO UK fund in partnership with Rand Merchant Bank (RMB). The fund now has £155m (R3.8 billion) of capital available for investment in hybrid capital transactions across the UK lower-middle market.
The popularity of the offering reflects a broader trend among South African ultra-high net worth individuals and families who are seeking refuge from volatile public markets and looking offshore for uncorrelated investments in hard currency that deliver equity-like returns with lower risk.
“The traditional 60/40 (equities and bonds) portfolio allocation is simply not fit for purpose anymore,” says Dino Zuccollo, head of Investor Solutions at Westbrooke Alternative Asset Management. “The correlation between stocks and bonds is strongly positive when global inflation exceeds around 2.5% p.a. which is where we are today. This means that portfolios are increasingly moving in the same direction and are not protected like they used to be.”
The shift comes as South African investors grapple with years of market volatility driven by factors such as wars, the pandemic, tariffs, and political uncertainty. This has forced capital allocators to seek alternatives that offer diversification, downside protection and attractive returns.
Zuccollo adds, “It isn’t portfolio theory alone which has driven the rapid recent adoption of alternatives. By investing in companies which operate in the lower and middle market segment, we can exploit capital market inefficiencies to earn greater returns than the level of risk we are required to take. This is very attractive for clients, especially in established, hard currency jurisdictions such as the UK.”
The alternative asset manager’s latest fund, the Westbrooke Dynamic Opportunities UK Fund II Plc, provides investors with a debt-led approach to UK private equity investing. It targets an annual dividend of 6-8% p.a. and overall annualised return of 15%+ in GBP (net of all fees and costs).
Westbrooke’s fund aims to provide secured loans to UK lower-middle market businesses through a hybrid capital approach – essentially, debt like investing with negotiated equity upside. This allows investors to access the growth potential of private companies while maintaining the security of being a lender.
“South Africans have traditionally lagged in alternative investments compared to international markets, but we’re seeing noticeably higher uptake,” Zuccollo explains. “The depth of knowledge and understanding of the asset class has improved significantly in recent years, and Westbrooke has made significant strides in facilitating and improving access.”
Since establishing its UK operations in 2017, Westbrooke has arranged approximately £750 million in deal value. Its first UK Dynamic Opportunities Fund, launched in late 2022, has delivered an 8% cash dividend, 15% annual return and has already returned over 35% of committed capital to investors.
Hybrid capital investing allows investors to benefit from contractual, interest rate-linked yields that provide an inflation hedge, reduced volatility compared to public markets, and portfolio diversification, while accessing the growth potential of UK lower-middle market businesses.
“The compelling side of this approach is that you’re well protected on the downside, despite the potential for higher returns,” says Zuccollo. This is in line with Westbrooke’s focus on capital preservation.
Rob Leon, co-head of RMB’s Investment Banking Division, added: “Westbrooke’s expertise in the UK lower-middle market, proven track record, and innovative approach make them an ideal partner for RMB, while allowing Westbrooke to continue to support UK businesses with flexible capital solutions. Our commitment in WDO, deepens our strong partnership with Westbrooke and demonstrates our capabilities in supporting our key sponsor clients.”
The fund remains open for additional investment through a second close later in the year, as demand for alternative strategies continues to grow among South African investors.