ARC Investments, effectively majority-owned by Patrice Motsepe’s Ubuntu-Botho Investments (UBI), is seeking to delist from the JSE at a 21% premium to where the share had been trading over the last month. This represents a 23% discount to the net asset value as reported by the group in its results on Tuesday.
This has caused some consternation among the investor community, with many questioning not only the premium but also ARC Investments’ valuation of its underlying assets.
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Read: ARC hopes to delist from the JSE
Its 21.76% stake in telecommunication player Rain is valued at R5.639 billion, and its effective 15.9% stake in TymeBank (South Africa) and 12.6% in Tyme Global (via ARC Financial Services Holdings) are valued at R2.25 billion and R1.19 billion respectively. This holding in ARC Financial Services, which includes shares in Alexforbes, Sanlam Third Party Asset Management, and Capital Legacy, now comprises nearly a third of the valuation of the fund (31.9%), or R7.2 billion.
The offer for the 40% of ARC Investments which UBI and its related entities don’t already own values the fund at R14.8 billion.
But the financial services chunk and Rain are together valued by the fund at R12.8 billion. You can see why shareholders aren’t exactly clamouring to sign up to sell their shares.
The business process outsourcing assets are valued at R1.9 billion, with mining, construction, and energy holdings worth another R2.8 billion and the remaining legacy financial services stakes (outside of the ARC Financial Services structure) valued at another R2.7 billion. This amount includes a R1.05 billion holding of its own (ARC Investments Limited) shares. So, the company knows – and has known for years – that its shares are undervalued.
Premium is half the problem
The so-called ‘premium’ is just half the problem.
What shareholders would be (and have been) more displeased about is the substantial amounts of fund management fees paid by the listed entity to the general partner.
Following its listing in September 2017, it was paying an average of R200 million a year in fund management fees to the general partner, being UBI.
In the four financial years between July 2018 and June 2022, it had paid a perfectly round R800 million in fees:
- Year ended 30 June 2019 – R156 million;
- Year ended 30 June 2020 – R206 million;
- Year ended 30 June 2021 – R213 million; and
- Year ended 30 June 2022 – R225 million.
In 2020, it controversially announced that it would use R205 million of the R750 million it intended to raise in a rights offer to pay fund management fees it owed to its parent (UBI).
In an interview with the Financial Mail’s Giulietta Talevi at the time, ARC Investments co-CEO Johan van der Merwe contended that the rights issue equates to “only 7.5% of the company” given its published net asset value (NAV) of R10 billion.
Read: ARC Investments to spend R205m from rights offer on management fees [Sept 2020]
In the pre-listing statement, ARC says part of the fund management fee is “in consideration for the General Partner’s obligation to maintain the ARC Fund’s B-BBEE credentials”.
It also says the fee is used to actually manage the fund.
Van der Merwe told Talevi: “We’ve also got a team of about 20 people – we rent premises, we travel, we work – who have to be paid. That is what the fee is there for.”
He said this is a “standard fee and if you look at private equity – and this is almost a listed private equity vehicle – private equity usually charges 2% and 20% [on outperformance] … We charge 1.75% on a sliding scale and 16% on outperformance”.
Just days later, ARC Investments U-turned and said it would “settle the fund management fee from internal cash resources”. It claimed this was a consequence of the board deciding to “cancel” the convoluted set-off agreement where the fee would be settled through subscription in the rights offer process.
Read: ARC Investments U-turns on rights offer plan [Sept 2020]
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This would’ve avoided the flow of funds from ARC Investments to general partner UBI, which then pays through 95% of the fund management fee to (unlisted) African Rainbow Capital as an “investment services fee”.
In the circular for the rights offer, ARC Investments said the board had determined that the set-off agreement was “the most commercially advantageous manner to do so”.
It expected investors to somehow believe that the rights offer proceeds and the rest of the capital in the business were somehow going to be kept separate.
This pressure from shareholders seemed to work. In 2021, it then announced that “the Company and the General Partner indicated that they would review the fee structure of the ARC Fund after five years”.
“The global and domestic environment has changed considerably since listing and consequently the parties are discussing the possibility of accelerating this review.”
Read: ARC Investments caves, will revisit management fee structure [Mar 2021]
In September 2022, it proposed a new methodology for calculating the fee: it would either charge the ‘current’ fee (ranging from 1.75% to 1.25% of invested net asset value) or “the actual cost of managing the ARC Fund, including the Services Fee charged by ARC and other direct costs incurred by the General Partner, plus a 5% mark-up thereon (excluding VAT)”.
It noted this could never be higher than the fee as defined at listing. At a general meeting, 99.04% of shareholders voted in favour of this change.
Recent fees significantly lower
The fund management fees for the most recent two years have been significantly lower than in years gone by, at R98 million (year ended 30 June 2023) and R112 million (year ended 30 June 2024). Combined, at R210 million, the fee is roughly half what was being paid earlier.
Together, ARC Investments has paid over R1 billion in fees to the general partner. It owes a further R65 million for the six months to 31 December 2024. By the time it delists, it will have almost certainly paid R1.1 billion in fees to its parent.
Strange that co-CEO Van Der Merwe told the FM’s Talevi in 2020 that ARC and UBI did not make “huge profits” on the fees. It certainly looks a little different to that assertion.
“The fee is something that was there from day one. Maybe some people didn’t like it, but if they didn’t, they shouldn’t have bought shares.”
Listen to this SAfm Market Update podcast where host Jimmy Moyaha chats with ARC’s co-CEO Johan van Der Merwe about the group’s plans to move home and delist from JSE:
You can also listen to this podcast on iono.fm here.
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