Ethos Capital pleads for load-shedding clarity

• Government should make clear policies as power cuts affect all portfolio companies, says CEO

Ethos Capital Partners (ECP) — the private equity firm invested in Brait, Virgin Active and TymeBank — says business needs more clarity from the government on macroeconomic policy, including clear, transparent strategies to solve loadshedding.

“The biggest issues in SA are … load-shedding and policy indecision,” ECP CEO Peter Hayward-Butt said in an interview after the firm reported a modest increase in the fair value of its underlying portfolio in its firsthalf results on Wednesday.

“It’s not one or the other — in most cases they’re massively interlinked,” he said.

“Having clarity that there is a plan is what we need as business … you can work around the rest,” he said. “But at the moment government is so indecisive from one week to the next you’re actually not sure. There are too many issues that are outstanding. The government needs to start making policies that are clear, transparent and then stick to them.”

Hayward-Butt, also CEO of fellow Virgin Active shareholder Brait, says about R100m was spent in 2022 to provide about a third of the gym group’s health clubs with back-up power. Virgin Active operates 136 health clubs in SA, Botswana and Namibia.

While a further third of Virgin Active gyms have back-up power provided by landlords, plans are afoot to equip the remaining gyms with their own back-up power generation in 2023. Asked if that implies another R100m will be spent in 2023 on back-up power, Hayward-Butt said “it’s not exactly linear”, as the group focused initially on ensuring bigger gym facilities had back-up power.

“Clearly, load-shedding is a huge [issue]. It affects every one of your portfolio companies,” he said. “You’ve got to find a source of electricity that is stable.”

TRADED DOWN

Hayward-Butt’s comments come after a period of heightened market volatility due to rising inflation and interest rates that have worsened the effect of domestic blackouts.

He said that the group’s investment in Premier Foods, which owns brands such as Blue Ribbon bread and Iwisa maize meal, benefited from the difficult trading conditions as consumers traded down to more affordable food items. Yet while Premier can operate its baking business with generator power, admittedly at great expense, its milling operations require Eskom’s baseload availability.

“Its baking business you can run off a generator — expensively but you can run it,” HaywardButt said of Premier, which will list on the JSE’s main board on March 24 with Brait retaining a 47.1% stake. “Your milling business you can’t run with a generator — it’s just too big.”

Hayward-Butt’s comments come after ECP’s net asset value per share (NAVPS), including Brait’s valuation at its NAVPS, increased 1.3% to R10.80 in the six months to end-December, thanks largely to the performance of its unlisted portfolio.

The group’s NAVPS using Brait’s share price increased 3% to R8.51 over the six months.

Listed private-equity firms tend to prefer using NAVPS as their key financial reporting metric as it indicates how the valuation of their underlying portfolio is performing. ECP’s unlisted portfolio achieved an 8% return of R148m over the six-month period, predominantly driven by increases in the valuation of fintech operator Optasia after a partial stake sale, and strong performances from Synerlytic and Gammatak.

LISTED ASSETS

The listed assets, consisting of ordinary shares in Brait and MTN Zakhele Futhi as well as the Brait exchangeable bonds, decreased 5%, 17% and 18% respectively, resulting in a negative return of R86m, net of coupon proceeds received on the exchangeable bonds. As part of its continued assessment to enhance NAVPS and manage the group’s liquidity, ECP’s board also approved a share buyback programme that it said “will be implemented imminently”.

Despite the challenging macroeconomic environment the group said ebitda (earnings before interest, tax, depreciation, and amortisation) of its 21 portfolio companies rose 16% on aggregate in the 2022 calendar year. ECP said the carrying value of its invested capital, which is exposed to 21 portfolio companies, was R2.6bn at end December 2022. The firm’s valuation of Optasia was increased after a new consortium led by an existing shareholder acquired a 17.4% stake in the company in December 2022, though there is an option to increase the shareholding to 20%.

The acquisition price was at a 22% premium to the valuation applied to Optasia by June 30 2022 that prompted ECP to make a “significant revaluation” of the investment on December 31 2022. ECP made a profit of about R184m from the stake sale in Optasia, an amount that included about R15m in dividends.

ECP still retains a stake in Optasia via its participation in the Ethos Consortium, which now owns 17% of the fintech operator compared with 20% before the stake sale in December 2022. The revision of Optasia’s valuation means it constituted 28% of ECP’s assets by end-December 2022, making it the largest asset in its portfolio.

THE BIGGEST ISSUES IN SA ARE … LOAD-SHEDDING AND POLICY INDECISION ... IN MOST CASES THEY’RE MASSIVELY INTERLINKED

Peter Hayward-Butt Ethos Capital Partners CEO