Motsepe’s ARC grasps the nettle of fees for fund manager
African Rainbow Capital (ARC), the investment house backed by Patrice Motsepe, has brought forward by a year the review of fees it pays a team that runs a fund housing its underlying assets.
The review comes almost a year after the company angered investors for floating the idea that it would use a portion of the R750m proceeds from a rights offer to pay outstanding fees to UBI General Partner for its day-to-day management of the fund.
The review could be seen as an implicit acknowledgement of a long-standing investor complaint that shareholder and management interests are not aligned, because UBI General Partner is paid a fee for growing the value of underlying assets, while shareholders are not seeing the same value reflected in the share price.
“We’ve started with the review of the fee structure. We see that it is definitely partially responsible for the discount that we experience but by no means can be the only factor. The big part is that holding companies
by their nature themselves take some sort of a hit,” said co-CEO Johan van Zyl.
ARC has grown rapidly since its listing in 2017, counting stakes in fast-growing start-ups such as data-focused mobile network operator Rain and TymeBank and boosting the value of its underlying assets from just over R5bn to R12.2bn.
But that valuation – which determines the fee UBI General Partner earns – has not been matched by the share price, which has fallen more than 70% since the company went public, leaving it with a market capitalisation of R4.86bn, significantly less than the sum of its parts even for a holding company.
It is not uncommon for investment holding companies to trade at a discount to asset value, but the acceptable shortfall is usually 15%-20%.
Nor is ARC the only company grappling with the financial inefficiency. The most striking example is Naspers, Africa’s biggest company. It owes its more than a R1-trillion market capitalisation to a stake of nearly 30% in China’s Tencent, despite having other multibillion-rand assets, including stakes in fastgrowing internet platforms in India, Brazil and Russia.
ARC was forced to backtrack in 2020 from plans to use just over a quarter of the R750m raised through a rights issue to pay for UBI General Partner, whose board is led by Motsepe and also counts former Nedbank CEO Tom Boardman as a director. It earns 1.75% a year on a net asset value of less than R10bn.
Van Zyl said the group had already done a great deal of analysis on the issue, including its position as a black empowerment company.
“It’s not an easy discussion, but it’s not something we are shying away from,” he said.
For the fund to add a layer of protection to its BEE credentials, it needs to be managed by UBI General Partner – whose more than 50% holding could be diluted if for one reason or another it is not able to follow its rights in the event of a share sale.
Van Zyl was speaking to reporters shortly after ARC reported its annual results, which showed a 16% jump in the value of the fund to R12.27bn, thanks largely to the contribution of Afrimat, a fast-growing open-pit mining company that is becoming a darling of investors as it cashes in on bumper iron ore prices.
ARC said, however, its focus will be on consolidating its businesses, including paring back its presence in mining, as it seeks to balance its portfolio amid significant market volatility.
“The operating environment is likely to remain challenging due to the ongoing political and economic issues that we face,” said Van Zyl.
“While we don’t think those effects can be reversed, and while we would like to be in the next year or so at pre-Covid-19 levels in all our businesses, the reality is we think the potential of SA has taken a hammering, and it will take a long time to get these effects out of our minds.”
Mining, construction and energy made up just under a fifth of ARC’s fund value to end-June, and telecommunications 29% but the former provided the biggest boost from the group’s existing assets.
The value of the group’s stake in Afrimat jumped 60% to R1.23bn at end-June.
ARC’s shares ended 3.25% lower at R3.57 on Tuesday.