Where are all the Steinhoff cheerleaders now?
In an extract from Rob Rose’s book, Steinheist, he argues that there appears to have been an epic failure on the part of the ‘experts’ who are paid to tell you which companies to avoid
While there were genuine sceptics in the years before Steinhoff’s collapse, there were an equal number of “experts” who would rattle on about the company’s “exciting prospects”. Rather like finding white South Africans today who will admit to supporting apartheid, locating those cheerleading analysts today isn’t especially easy.
There are also others who, shamelessly, will boast how they “spotted Steinhoff” years ago. Everyone is an expert about what happened yesterday. The fact is that on December 4, the day before Jooste resigned and the share price collapsed off a cliff, there were 17 analysts who covered Steinhoff, 11 of whom recommended that investors “buy” the share, six who recommended they “hold”, and exactly zero who called it a “sell”.
On the face of it, this appears to be an epic failure on the part of the “experts” who are paid to tell you which companies to avoid.
Butters says he believes this is partly structural: stockbrokers are typically housed in large banks or finance firms, which, on the other side of the Chinese wall, make a living from either advising companies on deals or providing them with the finance.
“There’s an implicit pressure on analysts to be positive because then those investment banks will be looked on favourably. At a company like Steinhoff, all the investment banks were falling over themselves to win a slice of its business for all the acquisitions it was doing.” And the fees that the investment bank charged Steinhoff for structuring deals in Europe were gargantuan. Page through the prospectus Steinhoff issued before doing its 2011 deal to buy Conforama, and you’ll see it paid R150m in “expenses” – R40.3m of which went to Citigroup, R40.4m to HSBC, and R42m to the Royal Bank of Scotland. In 2014, when Steinhoff bought Pepkor, it paid R40m to various advisers, including R30m collectively to various banks, including Investec, Deutsche Bank, Citigroup and Barclays.
Two things you’ll notice. Firstly, all these banks that buzzed around Jooste and scooped up the honey also have a stockbroking arm, which is meant to provide “independent advice” on companies. Secondly, the brokers who were critical of Steinhoff seem to have cost their banks valuable investment banking business. Take JP Morgan again: despite being rated as the top global investment bank, it didn’t get a share of Steinhoff’s dealmaking fees for years after the Sean Holmes fiasco.
If loyalty was the one characteristic that Jooste prized above all else, then any display of disloyalty would elicit the sort of grudge you’d expect to find more commonly in a Sicilian crime family. That ill will, he’d struggle to forgive.
Barry Norris is the founder of the Londonbased Argonaut Capital, which began doubting the Steinhoff story in about March 2017. At the time, Argonaut began “shorting” the share – essentially, betting the price would fall. Norris says he believes most analysts “missed” the Steinhoff issues because of the sort of structural tensions that others hint at. “The analysts at these brokers, attached to the big investment banks, aren’t really there to provide advice to fund managers. Rather, they’re there to help banks make money on big transactions. It’s rare for them to make a sceptical call because, firstly, they could get sued, and, secondly, they risk losing business,” he says. And there was plenty of money in that, since Steinhoff was raising a lot of capital to plug the holes in its balance sheet, not to mention the almost weekly takeover offers. “All the investment banks wanted to make fees on doing that business.”
Fraser Perring, who heads a research outfit named Viceroy which published a devastating report on Steinhoff two days after the retailer collapsed, agrees.
Perring, an ex-social worker from the UK, says the analysts who work for the big banks are often put under pressure to keep good relationships with the companies they cover. “There were plenty of analysts who covered Steinhoff yet it took us – me, a social worker and two exceptionally talented kids from Australia (Gabriel Bernarde and Aidan Lau, both 24,) – to pull together what had happened at Steinhoff,’’ he says.
With precious little sceptical research out in the market, large investors poured far too much money into Steinhoff. In particular, Perring reckons the government-owned Public Investment Corporation (PIC), which invests the pensions of civil servants, had no business investing in Steinhoff. “What was the PIC doing investing pension money in this piece of sh**? Did it just take 42 brandies and three meals for them to agree to invest money in Steinhoff?”
By the time Steinhoff exploded in December 2017, the PIC owned 8.5% of Steinhoff. This wiped about R16bn from government employees’ pensions. Other analysts speak of an “unspoken pressure” to be positive about Steinhoff. One told of how, when he was preparing to discuss Steinhoff’s takeover of JD Group, and just how bad this was for shareholders, during a roadshow, he was told “not to put out a negative recommendation on a Steinhoff deal during a presentation”.
What remains a remarkable feature of the Steinhoff story is that despite all this scepticism on the part of some of the largest investment houses in the world, Steinhoff ship continued to steam along as if these icebergs didn’t exist. “At one stage, about half the institutions in the country wouldn’t touch Steinhoff,” says Andrew Cuffe.
“About half the analysts covering the retail companies also thought it was dodgy. This changed. By the time it all went south, I think just about every institution was exposed to Steinhoff to some extent.”
The fact is, banks continued to lend to Steinhoff, and switched-on investors like Christo Wiese put money into the company, despite the red flags. The question is: why?
There is one potential answer, best summed up by a notion that first gained traction thanks to Adam Sweidan, chief investment officer of the London-based alternative investment firm Aurum Fund Management. Speaking in Australia in 2014, Sweidan referred to “a herd of black elephants gathering” to describe events like fresh water pollution and global warming.
“When they hit, we’ll claim they were black swans which no one could have predicted, but, in fact, they are black elephants, very visible right now.”
This “black elephant”, in other words, is a combination of the elephant in the room that everyone knows about but doesn’t want to discuss and the “black swan” event that is supposedly unforeseen but has the potential to cause untold devastation. Andrew Cuffe believes this aptly describes the unspoken knowns about Steinhoff, dating back a decade. “In the investment community, Steinhoff really was the elephant in the room. And in the end, when Steinhoff collapsed, we all know what sort of black swan impact that had on our market.”
● Steinheist, by Rob Rose, published by Tafelberg, retails for R295.