African Rainbow Capital (ARC) Investments, the empowered investment company founded by Patrice Motsepe, plans to halve its management fees to narrow the discount between its listed valuation and its intrinsic net asset value (NAV).
The JSE-listed investment holding company, the only asset of which is the ARC Fund, trades at R5.51 per share, about 45% lower than ARC Investments’ intrinsic NAV per share of R10.06. The ARC Fund is a vehicle comprising 52 companies spanning telecoms, mining, agriculture, financial services and other sectors.
While such discounts are a common feature of investment holding companies, ARC Investments plans to roughly halve its management fee, now calculated at 1.5% of the average opening and closing invested NAV of its portfolio per quarter. The total management fee declared in ARC Investments’ results for the year to end-June, released on Tuesday, was R225m, but co-CEO Johan van Zyl told Business Day it typically charges about R200m a year to oversee its R13.66bn portfolio, which includes TymeBank and Rain.
“The big thing for us really is that we’re dropping the fees — we’re really trying to address both our performance fees, but also specifically the management fee,” said Van Zyl. “We’d like to at least halve those costs. Hopefully, it will cut a big chunk of the discount to NAV.”
Van Zyl says ARC Investments has various proposals to move its management fee closer to the actual cost incurred in doing so, which he says is closer to R70m-R80m a year, though it will add on a 5% profit margin. The change in management fee structure will be implemented from July 1, but is still subject to shareholder approval at the AGM scheduled for November.
“Everyone invested will immediately profit,” said Van Zyl. “Overall, the business’s profit will go up by about R140m simply because we charge less fees.”
While shareholders of ARC Investments are likely to welcome attempts to address the firm’s traditionally high and somewhat contentious management fees, they’ll be less enthused by the firm’s admission in its latest annual results that it won’t be declaring dividends for the short to medium term, despite almost tripling its cash reserves to R669m at end-June.
However, Van Zyl says that’s to be expected from an investment fund that is only just entering its fifth year, as private equity-like companies typically only return cash to investors when they exit major investments, usually after seven to 10 years.
“The big dividends will come when we exit one of our big portfolio companies. You exit the big stuff from year eight to ten ... and then you pay substantial dividends,” said Van Zyl. “Unless, of course, someone comes along and makes us a crazy offer for Rain or TymeBank or the Elandsfontein phosphate investment ... and I wouldn’t rule those things out because these are very attractive assets.”
ARC Investments said in its results announcement that it is considering unsolicited offers it received for its shareholdings in some of its portfolio companies. But the company is likelier to focus on offloading its remaining 7% stake in Afrimat after already disposing of 12.4-million shares in the pit mining company for R740m in the past financial year.
Kropz, its phosphate mining and processing operation, could also be on the block after its management opted to impair its investment value due to difficulties experienced with ore body variability, which requires alternative mining methods.
“Moving forward, we’ll probably have a bit less of mining and much more value add,” said Van Zyl. “We’re looking much more at fertiliser play than simply phosphate.”
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