This article was first published in the latest issue of the Moneyweb Investor. To read the magazine click here.
Imagine a company that has absolutely no track record, but wants you to buy its shares on the JSE. Why would you do it? There is only one reason – you trust the people behind it can make something good with your money.
For many years it wasn’t possible to list on the JSE unless a company had a solid history of operating successfully. That changed in 2014, when the JSE allowed what it calls special purpose acquisition companies (Spacs) to list and take money from shareholders. The idea is that they then find assets to purchase, acting almost like an investment holding company. Two years down the line, we wanted to see how they are doing. The answer is mixed, with some still trying to find assets on which to spend their money.
The main JSE requirements for Spacs are that the directors must have a direct interest in the company and the company must deploy the capital within two years of listing or return the assets to shareholders. In the interim the funds are held in a trust. A Spac must raise at least R500 million to list on the main board or R50 million to list on the AltX exchange for smaller companies.
The idea is that Spacs usually have big names involved: people with a successful business track record. Heavyweight business personalities such as Christo Wiese (Pepkor/Shoprite), Meyer Kahn (formerly at SABMiller) and Richard Came (former Dimension Data co-founder) are among those who have thrown their weight behind Spacs. While they are new on the JSE, they are inspired by other investment holding companies such as Venfin, PSG, Remgro, Reinet and, more recently, Brait.
Most Spacs enjoyed an initial surge on listing as investors proved willing to back the names and management teams. However, their share prices subsequently tapered off, dwindling down to well below their listing prices. The market mood now seems to be one of caution.
The first issue is liquidity. Simon Fillmore, CEO of Independent Securities, a stockbroker catering to high net worth clients, says if a fund manager has a fair asset base to manage, say R5 billion, and wants to allocate 5% towards a Spac, it would not be able to buy that volume of shares. “You really won’t be able to get a decent allocation that would be meaningful to your client base,” he says. “It may improve over time as investments are crystallised. But it becomes similar to a private equity investment.”
That raises another issue: even for a successful Spac it may take quite some time before returns are generated. Ridwaan Moolla, Absa Stockbroking’s head of digital for wealth & investment, outlines a typical scenario.
“Say you invest now in a Spac, the company still needs to find an investment. Once it does, it may have to form a new operating company or acquire one, then develop the operations before finally it starts generating revenue and profits. That could take a while.
“Also, you’re essentially becoming a shareholder of a company that has a shareholding in another company, earning a percentage of a percentage of profit. It is quite diluted.
“Those are the risks you take. A Spac may flourish but the gains will flow in the longer term.”
Those characteristics strengthen Fillmore’s argument that they resemble private equity investments with illiquidity and longer time horizons as factors to consider. “They might not be ideal for many types of investors,” he says. “You have to have a clear understanding of what you’re investing in and why.”
Prior to the changes that allowed Spacs, the JSE required a company to have a track record of five years before listing. That kind of trading history is still important for investors and Moolla is one who is cautious about investing purely on someone’s reputation. “They’ve got some big names in and are trying to leverage off that,” he says. “That worries me. You shouldn’t be selling a person’s name but what they do.”
Fillmore agrees, saying Spacs need to be assessed on a case-by-case basis with a view to getting some sight of the underlying investments. Still, investors would essentially be backing the management team and its abilities to pick winning investments. “The philosophy and strategy of management and their ability to effectively execute becomes very important,” he says.
Below we assess the Spacs that have come to the market.
Gaia Infrastructure Capital Ltd
JSE code: GAI
Listing price: R9.20
Current share price: R8.00
Gaia listed in November last year as a Spac with a mandate to take advantage of the infrastructure gap, said to be R3 trillion. It aims to focus initially on the renewable energy sector, then on the wider energy industry, transport and water.
Gaia has distinct private equity characteristics. It started off by raising capital through a private placement to qualifying shareholders and subsequently listed. So as it builds a track record, a secondary offering to the public is highly likely as a means to extract more value for current shareholders.
Management targets a gross investment return of CPI plus 6% and a dividend distribution rate of CPI plus 2.5%. Using the just-published CPI numbers, this represents a return of 11.9% on capital. An alternative view is that management targets a return of between 9% and 12%. That compares with the JSE all share index’s average return of 12.4% a year for the past five years.
The company is run by former Stanlib fund manager and Government Employees Pension Fund boss John Oliphant, who has experience in structuring private equity-type investments. The board includes former PSG executives Leon de Witt and Botha Schabort, who have facilitated more than R1.3 billion worth of investments in renewables. This could very well be a PSG protégé company given that PSG Capital was the sole book runner for Gaia’s private placement. PSG is renowned for its successful spinoffs, with low-cost bank Capitec and private education company Curro, both major success stories. A similar model is on the cards for Gaia which intends to separately list its operating assets in future.
Gaia seems interesting given management’s track record, PSG’s involvement and its clearly defined return objectives. Infrastructure/utilities is a defensive industry with potential to sustain a good dividend; however, it depends on political will to support private investment in infrastructure. It is yet to acquire operating assets and its strategy is to buy brownfield investments of not less than R200m in cases where the assets have not been evaluated previously, and execute investments of not less than R100m where assets have been evaluated previously.
M FiTEC International Ltd
JSE code: MFI
Listing price: R10.00
Current share price: R11.00
This Spac listed in November last year on AltX with the biggest shareholder being South African hedge fund Praesidium Capital Management. The board is composed of founding members of renowned tech companies Dimension Data and Mix Telematic. DiData co-founder Richard Came chairs the board, with Mix co-founder Robin Frew a non-executive director. Vantage Capital’s co-founders Chris Lister-James, Colin Rezek and Andrew Springate are also on the board, along with former RMB CIO Sabir Munshi.
Its objective is to invest in the financial technology sector by building a portfolio of profitable technology and services businesses which provide platforms, applications and solutions to both existing and emerging financial institutions. It also took the private placement route, most likely waiting to make a secondary issue once the price has improved. Such a strategy puts a lot of faith in management’s ability to create value.
The market opportunity is quite apparent, supported by a recent Moneyweb report saying that the big four banks invested R30 billion in IT in the last 12 months. Management believes numerous macro themes support growth in the fintech sector, particularly in developing markets, including growth in GDP and populations, an emerging middle class, increasingly high mobile phone penetration, growing high-speed internet access in Africa, the eagerness of consumers willing to embrace digital and personal finance innovations.
Its target return metrics are more crude. M-FiTEC seeks to generate R1bn in revenue within two years and $1 billion (R13.7 billion) by the tenth year, a compounded annual growth rate of 30%. And it intends to obtain a minimum Ebitda margin of 10% (earnings before interest, tax, depreciation and amortisation).
The tech sector has mostly attracted high valuations but it is accompanied by relatively high risk, as the ability to stay ahead of the technology curve is often elusive. The payoff can be astronomical but returns are negatively skewed. History shows that only a few tech companies survive through to maturity, but those that do are very profitable.
M-FiTEC recently renewed its cautionary statement which says it is in talks to acquire new assets. Although Rowlinson has a long track record in the fintech industry, it is with a relatively unknown firm, Wizzit Payments. However, the CIO, Greg Voigt, has worked in private equity and corporate finance for Brait and other organisations.
One area of concern is that M-FiTEC only managed to raise R76 million, way below the target of R360 million announced prior to the private placement.
JSE code: CTA
Listing price: R1.00
Current share price: R0.93
Capital Appreciation was one of last year’s listings on the main board that scooped a substantial chunk of South African capital seeking higher returns. Investors were attracted by a board and management team loaded with some of SA’s business heavyweights. They include Netcare co-founder Motty Sacks, former SAB CEO Meyer Kahn, former Bidvest executive Alan Solomon and the CEO of the Public Investment Corporation, Dan Matjila.
Its listing raked in R1 billion, double its initial target of R500 million. The PIC is the largest investor holding shares worth R310 million. Empowerment investors through Capital Appreciation Empowerment Trust and African Rainbow Capital have R70 million and R46 million respectively.
Capital Appreciation has a specific mandate to acquire or merge with other companies. Management is targeting companies in health care, education, financial services, insurance, technology, media and telecommunications. It has explicitly excluded the possibility of acquisitions in mining, manufacturing or retail, and is open to international acquisitions.
One year post its listing, the Spac is still to invest the money it raised. Management, however, says it is evaluating numerous potential acquisition opportunities. As a Spac, Capital Appreciation is legally mandated to execute at least one acquisition within the next 12 months or return the funds raised.
Given that it has no operations and its biggest asset is its cash, there is no objective way of valuing its shares.
JSE code: HUL
Listing price: R10.00
Current price: R12.00
Hulisani is the latest company to join the JSE’s main board as a Spac. Prior to its listing it had raised R500m through a private placement which was well supported by institutional investors. Eskom Pension and Provident Fund (33.32%) and the Government Employees Pension Fund (14.59%) are the largest shareholders.
The key personalities behind Hulisani are Asanda Notshe, a fund manager at Mazi Capital; Malungelo Zilimbola, Mazi’s chief investment officer; and Marubini Raphulu, MD of Calulo Renewable Energy. Malungelo is Hulisani’s CEO while Marubini is the chief investment officer.
Hulisani is looking to acquire or invest in companies focused on, and operating in, the energy sector. It believes energy is of immense significance and importance to the development of the African continent but hasn’t received the levels of investment it deserves. Investors seem to like the company as its shares closed the first day of trading at R17.90 which was 70.9% higher than its net asset value (NAV) of R10/share. It seems to have settled at R12/share which is still above its NAV.
Listing price: R10.00
Current price: R13.98
Renergen listed in June 2015 on the JSE’s AltX with an objective to invest in alternative and renewable energy sectors. A 2015 International Energy Agency Report says renewable energy will represent the largest single source of electricity growth over the next five years, driven by falling costs and aggressive expansion in emerging economies. This is augmented by the great promise renewables hold for mitigating climate change and enhancing energy security.
In August 2015, it acquired Molopo SA Exploration & Production, a natural gas business in the Free State. It owns the production right which spans 187 000ha. It also owns a second exploration right of a 52 000ha in Mpumalanga as well as farm-in rights to two reserves near the towns of Kroonstad and Heilbron. This amounts to proven 25-billion cubic feet of helium and natural gas reserves estimated with the possibility of expanding to 245-billion cubic feet. It has since partnered with Afrox to commercialise the gas assets by 2018/19.
Renergen made a second acquisition, Mega Power Renewables, a hydroelectric opportunity in Côte d’Ivoire. Management says once a feasibility study has been completed, Mega Power Renewables Africa and Compagnie Ivoirienne d’Electricité CI-Energies, the state-owned energy utility, will enter into negotiations on a power purchase agreement which typically takes a form of a 35-year take-or-pay arrangements.
In May 2016 it entered into an agreement with Unitrans Passenger to supply compressed natural gas to power 10 of its gas-fuelled buses operating in Free State. The contract marked the first sales of locally produced onshore natural gas. It has also entered into an off-take agreement with Linde Group and management says it is concluding other off-take agreements. However, we are yet to see its operating results since it commenced sales in May.
Renergen CE Stefano Marani has experience in the areas of structured finance and advisory. He trained at Deutsche Bank, and moved to Morgan Stanley where he was ultimately charged with building its sub-Saharan African fixed income capital markets business. The board is chaired by former Afrox boss Brett Kimber and other board members have decent track records in the fields of finance, strategy and engineering. Its majority shareholder, Tamryn Investment Holding, o[CA1] wns more than 50% of the equity in the renewable energy outfit.
JSE code: SCV
Listing price: R0.00
Current share price: R0.00
Sacoven was the first to list as a Spac since the JSE opened its boards to “cash only” investment holding companies. However, it is little more than a cash shell: it didn’t offer any shares at listing, and the share price has remained at zero.
It was incorporated in Jersey, Channel Islands in 2012, listed on the Alternative Investment Market of the London Stock Exchange in the same year and listed on the on the AltX of the JSE two years later.
Sacoven‘s secondary listing on the JSE was by introduction – no new shares were issued to local investors to raise capital. Its only asset was £6m invested by the founding members and a few other selected investors. Sacoven said it planned to raise further funds from new and existing shareholders once an acquisition had been identified and the terms of the acquisition agreed. Its plans were to focus principally on the natural resources and consumer goods sectors, and it is looking at investments between £200m and £500m.
Sacoven has outsourced most of its operating functions to Vasari global, an international private wealth, multi-asset investment advisory company, chaired by Vivian Imerman, who is the only face that may be familiar to SA investors. Imerman was the head of fruit and food conglomerate Del Monte Royal Foods until its buyout and delisting from the JSE in the late 90s. Mark Daniell, who the company’s website says has over 30 years of experience in strategy, corporate finance and investment advisory roles, chairs Sacoven.
The arrangement between Vasari and Sacoven entitles Vasari to an initial fee on admission of £500 000 plus an annual fee of £450 000. So far Sacoven has paid a total of more than £1m to Vasari despite not having secured a single investment opportunity.
If anything, Sacoven stands as a warning that Spacs don’t always work out.