The Public Investment Corporation (PIC) recently announced a joint venture between JLL and the Empact Group to broker the sale of various of its properties — a strategic decision to optimise the Government Employees Pension Fund (GEPF) property portfolio. The PIC says it has identified about 70 assets that fall outside its investment criteria that it wants to dispose of in 2021.
What the PIC has done with this joint venture is the start of what I believe will be a growing trend to optimise private equity and investment holding company portfolios by appointing external advisers. While property assets are quite different to equity, the same most likely applies to the PIC’s vast equity portfolio.
This joint venture highlights a notable characteristic of investment holding or private equity firms: despite having a dedicated in-house corporate finance team, they find that disposing of assets is not a core competence. They are frankly not good at it. There is a need for independent, specialist third parties to help with strategy. The PIC is to be applauded for having done so.
Private equity firms typically own a large portfolio of operations, which preoccupies the attention of their corporate finance team. Disposals are often a distraction from their core business, and they lack a wide network of potential buyers and familiarity with global markets and international acquirer strategies.
Choosing an appropriate exit plan depends on what a company wishes to achieve with each of its assets. It can vary. For instance, we recently consulted to a firm that ended up not doing a transaction as all it had wanted was to use the process to increase the net asset value of the subsidiary — as opposed to the more usual maximising value.
The private equity model is undergoing a transition. The traditional model has been for a private equity firm to buy a stake at a relative discount, grow the business and dispose of it at the back end for a premium. Now they are finding they have to pay more upfront to hook business owners.
The days are gone of negotiating a large discount by enticing owners with the prospect of a lucrative listing in a few years. Having paid a higher entry price upfront, they consequently need to achieve a higher price at the back end to realise a viable return on investment. It therefore becomes worthwhile employing the dedicated skills of a third party for that exit.
Reviewing portfolio
There would probably be many opportunities for the PIC to exit some of its privately held assets, though what makes it more complex than a typical investment conglomerate is whether the PIC is a direct investor or is funding a third party as the investor. The opportunity exists to expand its role from that of a pure funder to the added value of growing the underlying businesses and realising a greater return on exit.
An investment holding company’s core activity lies in regularly reviewing its portfolio to understand the dynamics of the return on investment, how each asset is performing, and being alert to opportunities in the portfolio to redeploy some capital to higher potential assets, based on new trends or growing industries.
What typically occurs in any portfolio is a progression of ebb and flow. In times of economic prosperity there tends to be a process of diversifying exposure and revenue stream. It is followed by a phase of offloading assets to return to core industries in times of economic difficulty. This is what occurred last year with the pandemic and lockdown.
SA is still in this latter phase. A lot of companies are under cash flow pressure and are thus receiving even more attention than usual. Private equity firms are assessing each asset to determine whether they require more cash to keep the business going, or they should cut their losses and redeploy the capital elsewhere with more certainty of a better return.
Once-viable businesses are so starved of working capital that essential maintenance is being neglected. Difficult decisions are required: a position must be taken about whether a business will one day return to normal operating. It’s a tough call on how long to keep a business open while it is burning up working capital.
These are the decisions investment holding companies such as the PIC have to be making, weighing choices against the knock-on effect of poor performers on the rest of the portfolio. A second set of eyes is often invaluable. We have heard of cases in which 95% of the assets in a portfolio are under cash flow strain, while others in the PPE and medical sectors are thriving.
Transparency and governance are the primary drivers of a successful transaction, especially where foreign buyers are concerned. As the PIC has many great assets within the portfolio, it should be looking closely to ensure there is full transparency and disclosure of all assets. That alone would enable its portfolio to flourish.
• Bahlmann is MD of Deal Leaders Africa.
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