Inevitability of investment holding companies going the way of the dodo

Years ago, I attended a Rembrandt AGM, and it was one of the oddest corporate events I have ever attended. It was held at Oude Libertas in Stellenbosch, one of the town’s landmark buildings. The location was resonant: Oude Libertas was once the homestead of free burger Adam Tas, South Africa’s original antimonopoly campaigner, who spent over a year imprisoned in Cape Town’s Castle of Good Hope for challenging the monopoly of the Dutch East India Company.

Since it was a Rembrandt AGM, everyone was smoking – I mean, everyone. The company secretary had no problem allowing me to attend as a journalist even though I had no invitation. The group wasn’t big, about 50 people, but it included notables from the town as well as a large Japanese contingent.

Through the fug arrived Remgro chairperson Johann Rupert, who spoke in his ambling way about this and that, before rounding on fund managers. He was speaking essentially to a group of fund managers.

He launched into an argument about investment holding companies, which Remgro is, of course. His argument was simple: by investing in Remgro, investors got a balanced, diversified portfolio of industrial companies without having to pay the outrageous fees associated with investing in, say, a unit trust.

I can’t remember exactly what had taken place at Remgro that year, but he was particularly bullish, so I presume Remgro was going through an upswing period.

From today’s perspective, Rupert’s arguments look very outdated. Over the past decade, the idea of the industrial holding company has been decimated.

This week, one of the last standing large investment holdings companies, Rand Merchant Investment Holdings (RMI) announced its intention to not exist. Not only would the company go through with the unbundling of Discovery and Momentum Metropolitan announced previously, but its CEO Herman Bosman said it would kinda swap its JSE listing for its last remaining large holding in OUTsurance.

The market cheered, of course, because the whole scheme would result in shareholders effectively getting shares worth R35-billion, which translates into about 10% more than the value of their RMI holding.

The reason is that investment holdings companies typically trade at a discount to the value of their investments. In the good old days – the days when Rupert was addressing a smoke-filled room – that discount used to be around 5%. But over the past decade, the discount has just got bigger and bigger. Even RMI’s discount was about 30% at one point.

RMI’s decision has been bolstered by the PSG Group deciding to unbundle and delist earlier this month. Memorably, PSG CEO Piet Mouton pointed out at that announcement how difficult it was to raise money at the holding company level because, essentially, before any new investment makes money, it would have to overcome the 20% or 30% discount attached to capital.

So what do we make of Rupert’s argument today? It’s more complicated than it seems because investment holding companies do have some arguments in their favour. If the company is investing in listed companies, it’s one thing. Investors can, and probably should, invest in those companies directly. But what if the investments are in companies you could not get access to otherwise?

Investment holding companies also tend to be historical outcomes of peculiar situations. Lots of BBBEE companies in SA are essentially investment holding companies. Holding companies can arise out of some careful nurturing of a host of start-ups, which, of course, we all want.

And what of Remgro? To its credit, the company monitors its intrinsic net asset value very carefully, and declares the discount. And currently, the discount is large, around 35%. But there are lots of companies in the Remgro portfolio that investors would not have access to otherwise.

On the other hand, there are lots that are listed, including RMI. Then there is also Mediclinic, Distell, Grindrod and a bunch of others. Income growth has been excellent, and margins are excellent. But little of that has been reflected in the share price, which is around what it was in 2013.

Unbundling is a tough choice for managers and owners, but at some stage, it just becomes inevitable.