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The PIC and the myth of its unlimited resources

The government guarantee may yet turn into an oxymoron.

Reading the voluminous Public Investment Corporation (PIC) integrated report, I cannot help but think that “the plague rats of the language virus” – which is how Don Watson describes consultants in Death Sentence: The Decay of Public Language (Alfred A Knopf, 2003) – have crept in.

The PIC has now embarked on growing its “client base and investment offerings through innovative thinking”, aims to be a “catalyst of continental economic integration”, and will be investing in people and creating “brand ambassadors”.

The PIC, through its strategic partnerships, has been able to “crowd-in” capital. Perhaps it can provide an explanation as to what this is. I am sure they are not referring to crowdfunding.

The PIC is one of the few state-owned entities that met the deadline to publish its results. But is it growing its asset base? There is little information provided on investments, and none on earnings per investment. This is quite concerning, as the Government Employees Pension Fund (GEPF) is growing its base of future pension fund beneficiaries. The pensioners could be forgiven for being nervous about whether their defined benefit fund will stay true to its intent. The government guarantee, relied on by far too many for comfort, may yet turn into an oxymoron.

The GEPF makes up 87.12% of the funds that the PIC manages. Other clients include the Unemployment Insurance Fund (UIF), the Compensation Commissioner Fund (CC), the Compensation Commissioner Pension Fund (CP) and the Associated Institutions Pension Fund (AIPF). The PIC’s role is to invest in funds on behalf of its clients, based on the investment mandates set by each client and approved by the Financial Sector Conduct Authority (FSCA).

During the year, a total of R3.25 billion was approved for investing in private equity and structured investment products (SIPs), R9.5 billion for impact investments and over R5.8 billion for unlisted properties.

Notable transactions concluded during the 2017/18 financial year include:

  • R400 million invested in RH Bophelo Ltd
  • R2 billion invested in African Rainbow Capital Investments Ltd
  • A strategic investment in Vodacom Tanzania worth R1.1 billion
  • US$350 million invested in Dangote Cement Plc.

Income statement

Revenue for the year is up 10.03% to R1.2 billion (2017: R1.1 billion). Investment income is also up 13.7% to R182.7 million (2017: R160.6 million).

However, the bad news is that profit for the year of R411.3 million is 22.8% down from 2017 (R533.1 million), and cash generated from operations of R416 million is down 30.2% from 2017 (R596.4 million). Total cash at the end of the year is at R299.8 million, down 25.6% from 2017 (R403.2 million).

Impairment losses, in regard to the equity and preference share investment in Bophelo Insurance Group (BIG), amounted to R82.3 million. The PIC wrote off its investment in BIG, which is an insurance group owned 70% by Mvunonala Holdings (Pty) Ltd and 30% by the PIC. BIG incurred a large loss on an investment in VBS Bank.

Despite the downturn in the economy, the PIC spent a total of R47 million on new furniture (R12 million), R11.4 million on IT equipment, and R22 million on leasehold improvements. This resulted in an overall increase in property, plant and equipment of 88.3%.

Balance sheet

The PIC provides no breakdown of its investments in listed shares and bonds. It is not possible to ascertain which good investments have been sold, nor whether the investments are sound. The PIC will only apply the International Financial Reporting Standard (IFRS) 9 from 2019, and this may have a significant impact on its impairment provisions.

It has recognised a deferred tax asset that mainly comprises the future economic benefit on short-term and long-term incentive provisions. No explanation is given as to what these incentives are. However, this is quite a significant number as a percentage of operating profit.

Calculated at the tax rate

 

2018

2017

2016

2015

2014

 

R000

R000

R000

R000

R000

Leave pay

4 756

3 223

2 413

3 115

2 393

Short-term incentive provision

39 497

44 815

36 225

34 140

29 210

Long-term incentive provision

48 344

47 052

48 614

45 200

 

Other provisions

-4 678

3 374

2 569

1 036

32 552

Deferred tax asset

87 919

98 464

89 821

83 491

64 155

% deferred tax asset/operating profit

22.7%

19.3%

19.9%

21.6%

26.5%

In terms of assets under management, the PIC has R2.7 trillion (2017: R2.4 trillion), making it one of the largest asset managers on the African continent.

Worryingly, the PIC is juggling a few competing objectives: maintaining a healthy capital base to produce returns exceeding the cost of capital, and investing for sustainable growth, inclusivity and transformation. These objectives do not necessarily deliver a return, and can result in losses.

The PIC’s massive capital base will remain earmarked as a perpetual piggy bank, and the nervous GEPF pensioners will be watching this base stretching across a growing list of funding projects, until the foundations crack.

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Yes the language and the terminology is indicative of the thinking of those in charge at the PIC . I often read the fund fact sheets of unit trust funds i consider to invest in , and it is very evident that the unit trust fund managers live in a different universe ,
to those at the PIC .
The failure to provide detailed disclosure of asset allocation is also starkly different to any unit trust fund fact sheet .
Essentially the PIC is not that concerned over the bottom line results of return on investments , whereas for a unit trust fund manager it is all that matters .
Indeed the language in the PIC report is a sign of what is to come , am oving of the goal posts .

If your fund manager has social engineering in mind instead of growth of your funds, be certain that your pension prospects are in serious trouble.

Markets may not have a memory but people do.

The current chairman of RH Bophelo (R400m investment received above from pic) had a tumultuous past at the GEPF just a few years back. Coincidence or one, long shady, horror story.

Just by virtue of the fact it is named the PUBLIC INVESTMENT CORPORATION implies that the investments made should be made public and be disclosed.

Who do we think we are kidding?

PIC is massive, they have stakes in everything listed, they are a giant index tracking fund…

Their returns will be broadly ALSI linked…

Then ya the costs and bad investments to cronies, will be high and probably wipe out alot of what the ‘hard working diligent’ government employees should be getting.

Of course it’s government guaranteed. Unfortunately we’re their underwriters!

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