Quite a few pots at the end of African Rainbow Capital
The combination of visionary Patrice Motsepe and two former Sanlam investment pros is paying off big time
When investment holding company African Rainbow Capital (ARC) was launched a few years ago the market was abuzz with rumour and speculation as to what would be in its investment sights. Today it boasts a portfolio that is way more diverse than most people could ever have imagined. Combining the big picture vision of founder Patrice Motsepe with the proven investment track record of the two Johans (Van Zyl and Van der Merwe) from Sanlam was truly inspired, and the end result is highly synergistic. Management describes the business as a five-day game, rather than a T20.In broad terms, ARC is invested in two areas: financial services and diversified investments. Within financial services the key building blocks are insurance, asset management, banking and specialist financial services.
Diversified investments comprise telecoms, business process outsourcing (BPO), mining, construction, energy, property and agriculture. There are several unknowns, such as Rain and Metrofibre in the telecoms portfolio and Afrigem, Bluespec, Autoboys and Humanstate in the BPO portfolio. But there also are some very well known listed entities, such as EOH and Capital Appreciation (Capprec) within the BPO segment. Van der Merwe comments that EOH’s spectacular fall from grace in the past year caught them by surprise.The Val de Vie estate in Stellenbosch is included in the property portfolio. This is the estate where disgraced former Steinhoff CEO Markus Jooste resided.
The fund also owns 20% of recently launched competitor stock exchange A2X and 10% of Tyme Digital, which is Commonwealth Bank of Australia’s fledgling operation in South Africa.
Many of its investments have been acquired at appropriate discounts relating to the long-term vendor lock-in nature of the investments.
Incorporated in Mauritius in order to attract international shareholders, the company listed on the JSE in September 2017 and ironically was the second largest initial public offering behind Steinhoff Africa Retail last year. It predictably has a secondary listing on A2X.At listing, the largest chunk, 28%, was in telecommunications, followed by diversified financial services on 19%, Business Process Outsourcing & Mining, Construction and Energy both on 17%, Agriculture 10%, property 6% and other 3%. The unlisted to listed ratio is 80:20.
Listed investment holding companies invariably trade at a discount to net asset value (NAV), and as a rough rule of thumb this is around 20%. So, investors need to time their entry point into these types of structures appropriately. Try to acquire when shares are significantly discounted below the long-term average discount, and then hope that the discount will narrow over time as good results percolate out sustainably.
The ARC share price at end April 2018 was 680c, compared with the fund’s intrinsic NAV of 875c at December 2017, a 22% discount. Management is acutely aware of the discount nature of investment trusts and therefore prioritises the extent of its communications to the market, as well as delivering on NAV-enhancing investments.
ARC Investments is deliberately highly exposed to SA. While this approach imparted a big negative factor to the portfolio last year, as the country lurched from one political crisis to another, the very positive change in political sentiment following Cyril Ramaphosa’s election as state president has undoubtedly had a very calming effect.
Co-CEO Johan van Zyl says ARC Investments is spoiled for choice when it comes to investing in new ventures. “A skill we have had to learn quickly, is how to say no.”
Chris Gilmour is an investment analyst.