African Rainbow aims to make pots of gold for investors by listing on JSE

Former Sanlam CEO Johan van Zyl and former Sanlam Investments CEO Johan van der Merwe have been in a deal-making frenzy since leaving their alma mater to run Patrice Motsepe’s empowerment investment venture African Rainbow Capital (ARC).

Such has been the interest in ARC Investments that they have decided to list it on the JSE next month – three years ahead of schedule. Business Day spoke to Johan van Zyl.

You don’t have to list so why are you doing it?

You run out of runway. On the nonfinancial side we actually got many more opportunities than we initially thought and you can just turn away and focus on a few narrow financial ones. But there are great things available so we thought, why not use part of our money but make it much bigger?

Of the nonfinancial investments, Paul Harris and Michael Jordaan’s telco venture Rain is the biggest the ARC fund will have. Is it just a listed vehicle for that?

No. When we started this we hadn’t done the Rain transaction. I think the idea of having a whole lot of people participating in empowerment, if you want, is a great one. We thought deals might be hard to come by, but there’s a pipeline coming our way that isn’t readily available to the normal investor. What we now have is a credible opportunity. In general, we buy things at about a 20% discount … we’re an empowerment partner so people need that. On the other hand, they give you some sort of a lock-in — you’re not allowed to sell the stake for two or three years so illiquid has a real cost attached to it.

You’re an empowerment fund, but clearly anyone can buy you once you go public. How do you make sure you maintain black-owned status?

From day one we said to our investee companies that we guarantee we will remain blackcontrolled (51%) and then they have to work out their empowerment credentials that they get on their shareholder level. The other investors coming in can buy and sell whenever they want to, but we can’t, so we still have an illiquidity there and part of the fee we charge to manage the investment is going to the black shareholders.

How does the management fee structure work?

[It’s] twofold. There’s the normal fee to pay myself, Johan and others to do the five things private equity people do: raise money, find good investments, make investments, manage them and dispense with them.

Over and above that the fee also has to pay for the brand we use (ARC) and also making good on liquidity.

What is the fee?

It’s 1.75% on R8.5bn when the fund lists and it drops to 1.25% when the fund hits R15bn. And then there’s a performance fee of 16%. The hurdle is 10% … but there’s also a high-water mark: you may grow 10% in a given year, but because the fund came down the past year, say, you have to first make up what it’s fallen. It’s cumulative.

So to grow the fund then you’ll also have to go back to the market?

We prefer going to the market because if you don’t do the right thing the market will simply say no, we don’t trust you.

We think of this thing as a partnership between ourselves [as] empowerment player, with 51%, and a range of investors where we’ve said we want to grow this fund to around R30bn in the next five, six years. We think there’s ample opportunity.

And the proposition to the potential retail investor is capital growth?

Yes. And it’s liquid. It’s not like private equity where you have to wait seven years and things can go wrong. If you don’t like it you sell. Liquidity is a massive driver of value. Illiquidity has a big cost attached to it.

Have you already got the private investors lined up?

We’re there. The private guys are people we know and have done deals with. I think we’re going to be oversubscribed.

You aren’t tempted to raise more in the placement?

No, we can’t. We’re introducing assets of R4.5bn and we’re taking R4bn [from investors]. We have to secure the empowerment credentials so we can’t take more than R4.5bn [from ARC]. We don’t want to sit with too much cash – it burns a hole in our pocket. We have a committed deal pipeline of around R2bn [including Rain] but we also have assets and we haven’t geared the thing at all, so there’s no debt in there.

Johan, you’ve always been pretty positive and sanguine about the economy, right?

Listen, stuff happens all the time and I can’t tell you enough that in difficult times opportunities become available. I can’t tell you how many calls we get in a day – people who need black empowerment. I see a massive opportunity. I think we’re on to a gold mine here for the investors. We’ve been at it for two years and usually [in private equity] they would look at 20-25 deals – we’ve had about 400. We didn’t pick up the phone once, we didn’t pester anybody, they phoned us.

Ubuntu-Botho and Patrice created a good name for empowerment companies?

It has a brand, it’s also the giving pledge – giving away half his assets during his lifetime. This is why people like Johan and myself have come on board – we’ve had a good life in corporations, we’ve come from Sanlam which did wonders for the Afrikaans community, and this is what we want to do for black South Africans.

Let’s create a business venture from the outset. We bring stuff to the table; we bring empowerment credentials and money. Empowerment by itself has to lift the bar of the business. We don’t invest in a business where they simply take your money and go. Money has to stay to grow the business.

One of your investments is stock exchange A2X. Are you going to make good by listing on them as well as the JSE?

We’ll definitely list there and we’d love the prices to change so there’s a bit of arbitrage. These are the kinds of things that create value in markets.