JSE-listed Investec Property Fund (IPF), with assets in SA, Europe and Australia has grabbed headlines in the past few months because of its proposal to internalise its asset management function, with shareholders approving the transaction on May 17.
On March 1, IPF said it would internalise its entire asset management function in SA and Europe now undertaken by Investec for the purchase price of R975m.
A month later IPF announced that the R975m had been reduced by R125m to R850m via the introduction of an earn-out — a pricing structure in M&A enabling sellers to earn part of the purchase price based on the performance of the business after the acquisition. They typically occur over a three- to five-year period after the acquisition has been completed.
With the revised terms, Investec will put in R125m, representing a 12.8% discount to the original purchase price of the deferred consideration at risk in terms of an earn-out linked to the growth in the exiting assets under management (AUM) as at March 31.
Investec Property Fund listed in 2011 and has a portfolio valued at R23.5bn of direct and indirect investments in SA and Europe. About 56% of the fund’s asset base is offshore investments with an 83% interest in a Pan-European Logistics (PEL) portfolio worth about €1.1bn. The fund recently entered the Australian market through its 18.7% investment in the Templewater Australia Property Fund and 50/50 joint venture with Irongate Australia Fund Management.
Its shareholding has remained stable and includes Investec, with a 24% stake in the business, and as part of the deal, the group has a 12-month lock-up on that equity. Big shareholders include Coronation and the Public Investment Corporation (PIC), with Sesfikile Capital, Meago Asset Managers and Stanlib among the others.
CEO Andrew Wooler told Business Day what the internalisation of the fund’s asset management function means, and talks about the outlook for the business.
What does the internalisation of IPF’s asset management entail?
In simple terms, we are acquiring the management teams in both SA and Europe, along with all the contracts these teams have to manage the asset base. Effectively, we will now manage R37bn of assets in SA and Europe. Previously this was an external function outsourced to Investec. The internalisation means we have inside teams aligned with the business strategy, shareholders and other partners. This being a large merger transaction that requires the Competition Commission’s approval, we expect the process to become effective at the end of the second quarter to early third quarter of this financial year.
Did you consider extending the external contract?
We looked at multiple options because it was not just about internalisation, but also about the broader business strategy and what was needed to realise that strategy. For example, in Europe, we wanted more exposure and influence on what happens on the ground as well as bring in third party capital strategic partners — and there were natural impediments.
One of them was the existing joint venture (JV) structure, hence we bought off the partner. In SA, we want to play a role in consolidations within the sector, but it became evident that our structure was a potential impediment, as was the case when the opportunity to enter the Australian market arose. We’ve realised that having a fully integrated fund and asset management business opens a lot of different opportunities that accelerate and amplify our ability to deliver on strategic initiatives.
The internalisation enables us to introduce strategic partners in Europe, launch new platforms to bring in additional capital partners in all regions, and it removes inherent conflict of interest between the external manager and funding partners. Consolidation within the listed property sector in SA remains an opportunity which we can now pursue as the deal has simplified the business and opened new doors.
What are the cost allocations in SA and Europe?
The overall transaction was R850m with a potential R125m payable to Investec depending on achieving certain AUM growth pedals. But we will not go out as an IPF to try growing in order to pay R125m. We funded the transaction on a loan-to-value mutual basis without going to capital markets, capital recycling and big-lever initiatives.
We have not disclosed the different cost allocation between SA and Europe — we looked at the transaction as the holistic acquisition of a platform. We placed a high valuation on Europe because transaction multiples are higher for Europe and in developed markets relative to SA, and there was a longer length of contract relative to SA.
Is IPF going to earn money from managing these assets?
Not from day one because the assets are ours. To contextualise this — on the broader balance sheet — of the R37bn that we manage, only 16% of that is external — effectively funded by external equity. We will earn some fees but it is not material. We would like to move much more significantly into bringing capital alongside.
For example, in Australia, 94% of what we manage is third party equity. We generate revenue and fees from that, and this gives us the ability to diversify our investment base without utilising our balance sheet. We intend introducing more of these capital-light fund management-type opportunities giving access to different capital pools, with potential to utilise some of our portfolio to seed new strategies acting as fundraising tools, which will result in loan-to-value reduction. Over time, we will have less direct positions and more kind of working with third parties across Australia, Europe and SA.
The market is not crazy about the deal given that your share price is taking a beating. How do you respond?
The share price is probably driven largely by what happens with interest rates movements and we do not look at the share price daily. In Europe, we saw interest rates move negative 300 basis points to about 2.5%-3% by year end. This affected our bottom-line earnings number quite materially, mostly during the second half of 2022, and this weighs on short-term earnings and the share price. In a globally challenging macroeconomic environment, our focus is growing long-term value for shareholders.
What does the future hold for IPF?
The approval of the transaction is an important step on our forward-looking strategy. In SA, we have been active in trading and recycling noncore assets and have reduced our asset base from about 106 five years ago to 79. We have used the proceeds to fund offshore operations, and SA capex projects — and as part of the deal with Investec on the Mancos, we agreed on a significant tranche of deferred consideration to help fund the transaction.
Capex recycling is crucial to both managing the balance sheet and creating long-term value for shareholders. Despite global uncertainty and a rising inflationary and interest rate environment, in the past 12-months we have worked hard on repositioning the business and the platform to enable further growth.
Operationally, the business could not be in a better shape in all three geographies. Though it is daunting to leave Investec, the mother ship and the brand, we are excited about the next two to three years of implementing some of the strategic initiatives and building the business. There is cautious optimism around what we might be able to achieve — and in the short term, we expect to deliver low single-digit earnings growth in the next 12 months.
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