Over­sight of PIC is lack­ing

Rev­e­la­tions about its Isi­baya fund show it must be far more dis­cern­ing about the un­listed in­vest­ments it chooses to back

Financial Mail - - MONEY&INVESTING - Ann Crotty crottya@bdfm.co.za

Full marks to the Pub­lic In­vest­ment Corp (PIC) for once again re­leas­ing im­por­tant de­tails of its R69bn Isi­baya Fund, which in­vests in un­listed com­pa­nies.

Be­sides dis­clos­ing the sums in­volved, this year the PIC went one step fur­ther and pro­vided use­ful com­ments on the fi­nan­cial health and gov­er­nance sta­tus of each of its 100-plus un­listed in­vest­ments.

It is en­tirely ap­pro­pri­ate that these facts are dis­closed, given that the Gov­ern­ment Em­ploy­ees Pen­sion Fund, which is the source of al­most 90% of the R1.9 tril­lion the PIC man­ages, is guar­an­teed by tax­pay­ers.

The PIC says that Isi­baya’s em­pha­sis is on in­vest­ments with a “de­vel­op­men­tal fo­cus” — but that this fo­cus is not at the ex­pense of fi­nan­cial re­turns or gov­er­nance. Isi­baya “pro­vides fi­nance for projects that gen­er­ate fi­nan­cial re­turns while also sup­port­ing pos­i­tive [and] long-term eco­nomic, so­cial and en­vi­ron­men­tal out­comes”.

By this mea­sure, it’s hard not to con­clude Isi­baya has been some­thing of a fail­ure. It’s not just that al­most 30% of its in­vest­ments are fi­nan­cially un­der­per­form­ing, more than 60% of them are also de­scribed as en­vi­ron­men­tal, so­cial and gov­er­nance (ESG) lag­gards.

The over­whelm­ing con­clu­sion from the sched­ule of in­vest­ments re­leased last week is that the PIC should be more dis­cern­ing about the in­vest­ments it chooses to back. This is even more crit­i­cal, given that the PIC ap­pears un­able to ex­er­cise any con­trol over the in­vest­ment once it has pumped the money in. The re­sult: poorly per­form­ing in­vest­ments have to be bailed out, which means ex­pen­sive write-offs or even more cash. One pri­vate sec­tor in­vest­ment man­ager says the numbers re­leased this week shows that the PIC just doesn’t have the skills to ex­er­cise ef­fec­tive over­sight.

This is why as things stand, Isi­baya looks more like an easy fi­nanc­ing fa­cil­ity for the po­lit­i­cally well-con­nected than a de­vel­op­ment fund.

The sched­ule de­scribes 27 in­vest­ments — in­clud­ing the R11bn poured into Afrisam, the R9.3bn ex­po­sure to Stein­hoff In­ter­na­tional, the R1.2bn to Day­break Farms and the R1.2bn to In­de­pen­dent Me­dia — as “un­der­per­form­ing” fi­nan­cially.

The PIC does not say pre­cisely what “un­der­per­form­ing” means. But in the case of Afrisam, which has been writ­ten down to just R3.6bn, “un­der­per­form­ing” would be an ex­treme un­der­state­ment. No won­der the PIC is so des­per­ate for a deal be­tween Afrisam and PPC.

The in­vest­ment in Stein­hoff In­ter­na­tional, done through Jayen­dra Naidoo’s Lan­caster Group, is also un­der­per­form­ing. But at least this is likely to re­cover, given the out­look for the Frank­furt-listed global re­tail group and the re­cently spun off Africa-based Star op­er­a­tion.

The same can’t be said for poul­try pro­ducer Day­break Farms. The PIC has now se­cured the R1.2bn it has poured into this ven­ture since

2015. At the end of March that in­vest­ment was val­ued at R636m. Be­liev­ing the al­ter­na­tive was liq­ui­da­tion, the com­pe­ti­tion au­thor­i­ties al­lowed the PIC to buy out the BEE share­hold­ers.

The sit­u­a­tion at In­de­pen­dent Me­dia, which the PIC funded to the tune of R1.2bn, is less clear. There’s no talk of the PIC buy­ing out Sekun­jalo In­de­pen­dent Me­dia, the BEE con­sor­tium it funded. A more stark al­ter­na­tive was flagged by PIC CEO Dan Matjila at a re­cent par­lia­men­tary hear­ing, when he said an “exit strat­egy” at In­de­pen­dent was be­ing con­structed.

Over­all, un­der­per­for­mance in a range of in­vest­ments over a sus­tained pe­riod in­di­cates the PIC is lax in ap­ply­ing its in­vest­ment cri­te­ria. When al­most 30% of its in­vest­ments are tagged as un­der­per­form­ing it be­gins to look like an in­ept way of fund­ing po­lit­i­cal cronies.

Isi­baya’s fail­ure to meet its ESG goals is equally damn­ing. Be­cause the PIC is a sig­na­tory to the UN prin­ci­ples of re­spon­si­ble in­vest­ment and the UN global com­pact, fund­ing should only be pro­vided to projects that pro­mote sound gov­er­nance and good so­cial prac­tices.

While it may be easy to un­der­stand why small in­vest­ments strug­gle with ESG fac­tors, it’s dif­fi­cult to see why a sub­stan­tial player, like African In­fra­struc­ture In­vest­ment Fund, should be tagged an ESG lag­gard. Old Mu­tual, Ned­bank and Lib­erty are all in­volved in its man­age­ment and they can hardly claim to be short on skills.

There’s no quib­bling with the noble ob­jec­tives of the Isi­baya fund. But de­spite hav­ing board rep­re­sen­ta­tives in all its in­vest­ments, the PIC ap­pears to have no ef­fec­tive plan in place to en­sure these com­pa­nies meet even the most ba­sic gov­er­nance ob­jec­tives.

As the GEPF is a de­fined-ben­e­fit fund backed by gov­ern­ment, any short­falls will have to be made good by tax­pay­ers. Per­haps, given this fact, the GEPF should de­mand greater over­sight over the PIC, and its cu­ri­ous Isi­baya fund.

PIC CEO Dan Matjila

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