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
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.