ARC's turnaround a wise ’ and welcome move
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Understandably, investors struggled to comprehend African Rainbow Capital Investments ’ (ARC Investments) decision to launch a rights issue when the company’s shares are languishing more than 60% below the value of its underlying assets.
But perhaps what angered them was the idea of the company ’ s leadership team to use a third of the R750m proceeds to pay outstanding fees to UBI General Partner — a division of Patrice Motsepe’s Ubuntu-Botho — for its day-today management of a fund that houses ARC Investments’ underlying assets.
In an effort to defuse the situation, ARC Investments, which is controlled by Motsepe, decided to call off the plan to use any of the money to pay UBI General Partner, which earns a percentage of the value of underlying assets as payment to its investment committee.
It ’ s hard not to see the decision in a positive light.
For investors, it is good to see that their hard-earned money would not flow back to the fund ’ s executives when their equity has taken a pounding in recent years. Shares in ARC Investments have dropped by about 60% since its listing in 2017, widening the gap between the sum of its parts to nearly 70%.
Granted, managers of the fund — including Motsepe and former Nedbank CEO Tom Boardman — would argue it is only fair to be compensated for growing the company’s net asset value from R5.4bn when the company debuted on the JSE three years ago to about R9.5bn at the end of June 2020.
But they cannot escape the reality that shareholders are not seeing the returns because the stock price is a long way from what they say is the true value of ARC Investments. ARC is worth just R3.6bn, significantly less than the sum of its parts.
WEAK POSITION
At best, investors are holding back on loading up on ARC Investments because they ’ re not able to work out for themselves the value of the underlying assets as most of these companies are not publicly traded and ARC Investments is often not a majority shareholder.
Internet-focused mobile network operator Rain is one example. ARC owns just over a fifth of Rain, putting it in a weak position to push for the disclosure of the company ’ s books for investors to make their own assessment about whether its R16bn valuation is justified.
ARC Investments’ share of that valuation is about R3.4bn, more or less in line with its own market cap despite owning stakes in several other entities, including app-only newcomer TymeBank and pension fund administrator Alexander Forbes.
It is easy to understand investors ’ frustration over the lack of necessary visibility into some of the underlying investments ’ performance, but the only way around the problem for ARC Investments is to buy majority stakes in some of these companies.
At worst, shareholders are cynical enough to believe UBI General Partner’s valuation of the company’s underlying assets is motivated purely by the prospect of lining its investment committee’s pockets with fat management fees — something ARC ’ s co-CEO Johan van der Merwe, who also forms part of the team that runs the fund, denies telling Giulietta Talevi in the Financial Mail last week that auditors sign off on the valuations.
As a passive investor of virtually the entire fund, ARC Investments is ultimately on the hook to pay fees to UBI General Partner, which earns 1.75% a year on a net asset value of less than R10bn. The plan to use a portion of the R750m rights issue to pay outstanding fees to directors for managing the fund only added to that cynicism.
It is true that for the fund to maintain its BEE credentials, which allows it to negotiate discounts in new investments, it needs to be managed by UBI General Partner. But the fee furore has intensified pressure for management rewards to be much more closely aligned with the interests of private investors, who get nothing when a swelling net asset value is not matched by the share price.
It would not be a bad idea to outline concrete steps to narrow the big valuation gap even as ARC Investments needs the cash to hunt opportunistic assets in the middle of an economic downturn.
Perhaps it would also help investors to fully support the rights issue if some of the money was going to be used to buy control in unlisted assets such as Rain, allowing it to disclose more about their performance and give investors enough information to model their own valuations.
MANAGERS OF THE FUND WOULD ARGUE IT IS ONLY FAIR TO BE COMPENSATED FOR GROWING THE COMPANY S NET ’ ASSET VALUE