Questions over new vehicle for investing in BBBEE shares
Investors who see value and want to participate in BBBEE share schemes without the hassles of investing directly can now do so through a single vehicle. It’s called Ngonyama Capital and was launched by new black asset manager Cartesian Capital.
To ensure that Ngonyama qualifies as an investor in the schemes, 51% of its shares will be owned by black shareholders through an entity called Shumba. The remaining 49% will be owned by white shareholders through an entity called Ngala.
Ngonyama already has R175m under management.
“These shares offer better value than what the domestic mainstream share market offers,” says Anthea Gardner, managing director of Cartesian. “Over a three-year period, a reasonable expectation is a return of 50%-70% higher than owning the equivalent JSE shares. Assuming a 5%-10% per annum increase in the value of the underlying JSE shares, investors in Ngonyama could achieve a return in excess of 75%-100% a three-year period.”
A performance fee of 15% is levied for returns in excess of 15% achieved, but black investors will share in 75% of the performance fees generated, which effectively cancels out their paying of the performance fees.
As most of the underlying investments in these schemes are geared and have funding structures, restrictions and liquidity constraints, investors would be justified to have higher return expectations to compensate for the additional sources of risk. In that respect Cartesian’s expectations are that the shares will return between 25% and 35% per annum.
Together Cartesian and Anchor
Capital manage the assets as a portfolio on behalf of Ngonyama, with dedicated analysts researching the opportunities.
Cartesian was started in January this year by Gardner (formerly of Morgan Stanley in London and African Development Bank in Tunisia) and mining entrepreneur Mike Teke, who heads the house. Khanyisa Ngesi joined from Barclays in May as portfolio manager and analyst. Administration is outsourced while research is carried out by Cartesian and Anchor Capital.
Until last week when Cartesian got its FSP licence, the house had been trading as a juristic person under the licence of R4bn-house Anchor Capital, which also has a 20% stake in Cartesian. On Cartesian’s books already is a R135m long-only active equity institutional mandate with a 2% target return above its benchmark, the Swix.
Without a track record in managing money, how did Cartesian manage to raise R300m in mandates?
“We both, in our personal capacities, have good reputations in the industry, so investors are effectively for now only buying and showing confidence in our names, but we’re also innovative, which makes our offering compelling to investors,” says Gardner.
However, there are questions around the structure of the Ngonyama vehicle and its inclusion of white investors. Says Craig Gradidge, investment and retirement planning specialist at Gradidge-Mahura Investments:
“I do not understand the need for them creating Ngala. It seems like they are creating an opportunity for white investors to gain exposure to BBBEE shares which, while it meets the letter of the law, seems to go against the spirit of the law. These deals have been created as part of the broader objective of BBBEE aimed at uplifting previously disadvantaged individuals. I think they could have stopped at Shumba, the need for Ngala is not clear to me.”
Gardner says that “by allowing white investors into our structure, we are creating liquidity and bringing the shares to their realisation of value, which benefits all shareholders”.
Some schemes or companies such as Thembeka Capital, a broad-based black-owned and controlled investment company that focuses on private equity and BEE transactions, require that investee companies must have 100% black ownership.
Gardner says in that case the company is able to create subsidiary structures that are 100% black owned to enable investment in companies such Thembeka.
“As an asset manager,” says Gardner, “we add value by knowing the underlying and doing in-depth analysis of the actual BEE structures, which are not at all simplistic. We talk to management and ensure we understand the peculiarity attributed to each share. Even registering to trade the shares is a lengthy process and we do that for the investor. Trading and continually evaluating the share is crucial to understanding at what level the shares will deliver the best returns.”
Currently Ngonyama is invested in the Phutuma Nathi, MTN Zakhele, Sasol Inzalo and Sasol BEE shares listed on the JSE, as well as Yebo Yethu and Assupol.