We got into a right royal, but totally unnecessary tizz over Viceroy
South Africa quite simply isn't used to the kind of criticism that was doled out to Capitec
The reaction to Viceroy’s report on Capitec last week has verged on the ridiculous. A not-so-great little research outfit wrote a not-so-great report on Capitec. It was bearish. They had or have a short position in Capitec’s stock. The shares sunk 13% on the day the report was released but three days later the price had recovered.
This didn’t stop Capitec, the Reserve Bank, the National Treasury and a host of commentators from leaping to the front line of attack on Viceroy. The research was bad, they claimed. It missed key points about the banks’ operations. It made speculative claims about the way the bank reschedules its loans, falsely saying it was hiding losses. It made some quite outrageous statements about putting the bank into curatorship.All these critiques may be true – and largely were. But bad research is released every day. The difference is that most research – bad or otherwise – is on the long side. A positive research report can be just as wrong on the facts, but no one will complain provided that price is going up.
Viceroy had managed to capture a unique place in our imaginations. It published a report on Steinhoff, with some good insights, the day after Steinhoff announced big problems with its accounting and the resignation of its CEO. In the vacuum of information after Steinhoff’s thin announcement, Viceroy was the only commentator putting out some proper answers as to what had gone wrong. Viceroy took on the mantle of investment sage. It helped that, at the time, that Viceroy was anonymous, and so our imaginations really could run wild.
Most of us ignored what Viceroy does in the rest of the world. It is busy with a big fight in the US over biotech company MiMedx, alongside several other short sellers. It has tackled a few companies in Australia as well. In those markets, activist short sellers are not uncommon. Those markets have a fairly sanguine view – Viceroy may be right or wrong. On the whole, though, it’s good to have someone taking a negative view, just in case. The companies being targeted often come out all guns blazing in response, but regulators usually stay on the side lines.In South Africa, though, Viceroy touched a raw nerve. South Africans simply aren’t used to activist short investors. We don’t understand how to assess the quality of their claims and are incredibly touchy about anyone saying anything negative about a bank. Plus, Viceroy had been glorified to the divine, even though the firm was exposed to consist of a British ex-social worker and two 23-year-old Australians. When our new-found investment deity turned its wrath on a bank we think is quite well run, the hurt was palpable. We had been touched on our studios.
Viceroy would have had a short position in Capitec’s stock, so it profits if the price falls. This doesn’t mean its research is rubbish. It is perfectly possible, and reasonable, that if you discover a serious problem in a company (through legal means) you would take a short position and then let the world know. It is the mirror image of what many people do on the long side. There is no problem with the short equivalent and it helps market efficiency.
The potential wrong is not that Viceroy had discovered a serious problem, but rather that it was making things up in order to lower the price. This strategy – often called “short and distort” – would be illegal because it amounts to market manipulation. When anyone comes up with reasons for their rage over Viceroy, this seems to be the accusation. I doubt there is much merit to this – I think Viceroy genuinely believed it had found a real problem. The report it wrote, while weak, does provide a justification for its beliefs. For that reason, I don’t see much merit in regulatory action against Viceroy – it was not deliberately lying to the market. It had just produced shoddy research, which it believed. Happens every day.There are two real mistakes. One is ours – we took Viceroy too seriously. That is in part an accident of Viceroy’s history and its elevation in our imaginations on the back of Steinhoff. The other is Viceroy’s failure. Its report shows a clear misunderstanding of the consumer credit industry in SA, comical naivety about bank regulation and a bizarre tendency to cast aspersions at individuals and their motives. It does raise some good questions about the way Capitec reschedules its loans, though it then goes wrong in trying to answer these. It should have taken those questions to Capitec’s management, before it published its research. It should also have been a lot more cautious because Capitec is a systemically important bank and therefore the public interest considerations are different to other companies.
But that’s a criticism of business etiquette, social responsibility and research quality, not a claim they were trying to manipulate the market. And the fallout was not all bad: it will leave a legacy of improved disclosure from Capitec on their rescheduling practices.