Ethos Capital, an investment holding company with stakes in TymeBank, Ster Kinekor and Brait, has issued an upbeat forecast for the private equity industry, saying it is encouraged by signs of economic recovery and heightened investor interest in SA.
In the year to end-June the pandemic-induced economic restrictions wiped out about R120m in value from Ethos’s stakes in companies that also include media group Primedia, and corporate clothing and promotional gifting wholesaler Kevro.
Like other companies in range industry, Ethos’s underlying assets hunkered down in the pandemic, opting to preserve cash and protect market share rather than pursue new growth opportunities.
CEO Peter Hayward-Butt said on Monday there is a great deal more positivity in SA’s private equity market than there was 12 months ago, adding that the JSE is still open for good, high quality, and sizeable investments in the right sector, and there are growth opportunities.
While international markets are generally “more buoyant” than SA, Hayward-Butt said, signs of investor interest come from those looking to work with Ethos on potential listings. In some ways, notably retail sales, SA’s economic recovery from the pandemic has already been better than expected, he said.
“At the end of the day it will be driven by performance,” he said during an investor presentation. “That will give investors confidence that there is value to be had in playing in the SA and African markets.”
The local bourse has struggled to add new listings in recent decades, with critics pointing to a low-growth environment in a country were policy uncertainty remains a major risk.
Covid-19 recovery
The group said on Monday its net asset value held relatively steady at R1.7bn for its year to end-June, when its shares were trading at a 40% discount, but that Covid-19 helped underscore the benefits of the active management approach of private equity and the proactive management of businesses in general.
SA’s investment holding companies continue to battle with significant discounts to which their shares trade, often prompting a look at share buybacks rather than new acquisitions.
Ethos has a portfolio of 22 companies, including a R176m stake in gym-owner Brait, which makes up about 10% of its assets, while its R532m stake in Channel VAS, a provider of airtime credit services, makes up 28.5% of assets. Ethos owns a fifth of Channel VAS, which fared best, with its return growing 18%, or by R106.3m.
While a series of Covid-19 restrictions hit the owner of Virgin Active hard, helping to send Brait’s share down 14% in the period under review, Ethos said the response by management, including negotiating rental relief and restructuring debt, ensured greater financial flexibility for recovery.
Ethos Capital’s unlisted portfolio achieved a R107.2m or 7% return for the year, the group said, with Covid-19 reducing the value of pandemic-hit businesses 8%. This implies a 15% return for the remainder of the unlisted portfolio.
Primedia, 4% of the group’s assets valued at R68m, saw its value fall 19% year on year, hit by a pullback by companies in their marketing and advertising spending. There was a significant rebound in operating profit in the last quarter, said Hayward-Butt, and there are signs of recovery, driven generally by a recovery in SA in areas such as car sales, financial services and retail.
“Despite the difficult operating environment, the benefit of active management in private markets has been demonstrated in the sector-leading growth of a number of the portfolio companies,” the group said.
“Private equity as an asset class has outperformed the public markets over an extended period and Ethos is committed to driving and realising value from the Ethos Capital portfolio.”
Ethos said it is looking at new acquisitions, having spent its 2021 year in consolidation mode, rather protecting market position through bolt-on acquisitions. Two deals were close to being signed, Hayward-Butt said, adding that there are growth opportunities in the market, even though the group will also be looking to buy back shares.
In afternoon trade on Monday Ethos’s shares were unchanged at R4.60, having risen 15% in 2021, but having fallen almost 40% since the start of 2020.
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