JOHANNESBURG – JSE-listed asset manager Anchor Group has taken a leap in realising its global ambitions with an announcement on Wednesday that it reached “commercial agreement” to acquire 47.41% of Capricorn Fund Managers (CFM).
Anchor buys 47% stake in Capricorn AM brings R6bn into pot & nice juicy profits – on face a good deal
— Anthony Clark (@SmallTalkDaily) October 14, 2015
Owned by a group of privately held entities, namely CCFM Limited, The Capricorn Fund Managers Executive Trust, CV Cinque Limited, CV5 Limited, CFM Founders Limited and Capricorn Holdings International Limited, CFM is a family and partner-owned fund management business. It has managed hedge funds since 2003 and has roughly R6 billion of assets under management. It established an office in London in 2008 and essentially covers and invests in companies in emerging markets, including South America, South Africa, Malaysia, Russia, Turkey, Indonesia, Mexico and the Philippines.
Anchor CEO Peter Armitage says following the transaction, its international contribution to earnings should be in excess of 30% of profits. Prior to the transaction, it was roughly 10% and the ambition is to raise it to 50% “in a few years’ time”.
Armitage says they “are talking to a few parties” about other acquisition opportunities that could help the group get to 50%, but it is still early days.
Considering that its most recent acquisition is a bet on emerging markets, chances are that Anchor may be fishing for opportunities in developed markets – although time will tell.
Anchor will pay R348 million for the stake – R256 million in cash and the balance by issuing 7.7 million Anchor shares at R12 a share.
While its proposed stake is meaningful, the founders and management of CFM will retain a majority economic interest in the business.
Why settle for a minority stake?
Armitage says their game is all about people and there is no way they would want a 100% of the company.
“You want the people running it and the fund managers to have material stakes in it.”
Additionally, there was no appetite from CFM’s side and initially it only wanted to sell 25%. All of the shareholders in CFM are maintaining a stake in the company, but will see a portion of it being diluted. The sellers have undertaken to invest a portion of the cash proceeds into the various funds that CFM manage.
Moreover, if Anchor were to own more than 50% of the company out of South Africa, it would become a SA-controlled company, which have some tax implications, Armitage says.
They essentially view the transaction as a partnership with CFM, he says.
In a business like manufacturing one may want to opt for a 100% stake and control the business “so you can do what you want to do, but in these people businesses you want to keep the magic”.
Rob Fihrer, CEO of CFM, says they were impressed with the growth, commitment to quality and entrepreneurial approach of the Anchor management.
“CFM believes that the access to experience and talent, and the synergistic fit within Anchor’s distribution network will translate into a continued path of growth and success for the CFM group and most importantly the business’s investors. The sellers had no desire to exit fully, given the exciting growth prospects and 13 years of involvement in the business, but were prepared to partly sell down to introduce a value-adding asset management partner which can significantly enhance the growth of assets under management.”
Fihrer says as a listed business with material balance sheet capacity, the parties were able to agree on a price which balanced the current status of the business and future growth prospects.
“The CFM shareholders also found exposure to the Anchor share attractive, especially considering that they will play a meaningful role in the success of the company and consequent share price action.”
With the local hedge fund industry on the cusp of significant change following regulatory amendments that would allow hedge funds to launch as collective investment schemes, Armitage says there is some quite nice potential in the hedge fund space locally.
At its core however, Anchor is a long-only business. Roughly 70% or 80% of its assets are long-only assets, and this will remain the case.
From an offshore perspective, markets will probably be “less exciting” for the next five years and well-run hedge funds offer the opportunity to make money when markets are not playing along. This is especially true in emerging markets, which are very volatile.
“I think it is quite a nice way to play emerging markets.”
Anchor’s share price closed 2.4% lower at R14.30 on Wednesday.
The acquisition is still subject to conditions and regulatory approval.