African Rainbow Capital (ARC) Investments faces the prospect of trading at a discount to its net asset value (NAV) when it lists on the JSE next week due to its complicated cost and management structure.
The company – which mining magnate Patrice Motsepe is taking public after two years of quietly snapping up minority stakes in Alexander Forbes, EOH, Afrocentric Health, Rain and Santam – is listing with an initial portfolio worth R4.5bn, and seeks to raise R4bn in capital from investors at R8.50 per share. The net proceeds of the listing are expected to raise total assets to R8.4bn.
ARC Investments, which has been set up as a holding company with its assets held in the ARC Fund, a private-equity structure, will charge a management fee of 1.7% a year on the average of the invested and closed net asset value of each quarter. Should the value of its assets stay the same by November, when the first management fee is due, investors are due to pay a steep R35.7m in fees.
This excludes a 0.25% annual cash management fee, payable every quarter. It also excludes a 16% "performance participation" incentive, which will see the general partners of the fund – including Motsepe and joint CEOs Johan van Zyl and Johan van der Merwe – converting a lower class of shares into ordinary shares on achieving a 10% yearly growth in assets. "This fee structure would attract a discount to the NAV in terms of valuation, but this would be offset against one’s personal view of the stated R8.50 a share NAV, how conservative it is, for example if the true intrinsic NAV is actually quite a bit higher; and the credentials of the management team involved," said Jean Pierre Verster, a portfolio manager at Fairtree Capital.
Investors would be eyeing the fund’s black economic empowerment credentials.
Alphawealth analyst Keith McLachlan said the fund’s costs implied a 20% discount from the first day of trading, likening it to investment company Astoria.
Astoria, which holds shares in US blue chips, such as private equity firm Blackstone, social media giant Facebook and technology company Apple, is trading at R11.65, a 25.4% discount to its NAV of $1.12.
It appeared that telecoms operator Rain would represent 30% of ARC Investment’s NAV, key to assessing the value of the R8.50 offer, Verster said.
Adrian Cloete, portfolio manager at PSG Wealth, saw value in the operator, which held the only licence in the 2,600MHz spectrum. "Rain has made significant progress in building a dedicated national LTE Advanced network in the valuable underutilised frequencies. [It] could disrupt the mobile market.
"The R8.50 is a fair price to offer to outside investors as they get the opportunity to participate in investment opportunities normally only available to broad-based black economic empowerment companies."
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