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ARC Investments to spend R205m from rights offer on management fees

Since listing, nearly half a billion has been paid in fees …
In three years, and including the sum to be settled following the rights offer, it will have paid R453m in fees to UBI. Image: Moneyweb

African Rainbow Capital Investments will spend R205 million, or 27%, of the R750 million it intends raising through a rights issue to pay outstanding fund management fees to (effectively) its parent.

The company announced the rights offer last week and said the additional capital would be invested “in the ARC Fund for use in its existing portfolio companies as well as for future acquisition opportunities”.

It also said some of the proceeds would be used to settle “the outstanding Fund Management Fee”. It provided no further details until the publication of the circular on Monday.

In the circular, it was revealed that the Mauritian-based JSE-listed investment holding company had accrued fund management fees totalling R205.66 million over the last financial year (from July 2019). These payments are due to general partner UBI on a quarterly basis. UBI then pays through 95% of the fund management fee to (unlisted) African Rainbow Capital as an investment services fee. African Rainbow Capital is majority owner (51.1%) of ARC Investments, which in turn owns the majority of the ARC Fund. This houses all the group’s investments, save those in the financial services sector which are co-owned by ultimate parent African Rainbow Capital and ARC Investments (via the ARC Fund).

Group structure

Source: ARC Investments results presentation

ARC Investments notes in the circular that if the fund management fee is “not paid on due date, it accrues interest at the prime rate plus 5%”. The R205.66 million payable excludes any interest as the “general partner has agreed to waive all accrued interest on the outstanding fund management fee provided that it is settled at the time of the rights offer”.

What is curious is that the pre-listing statement specifies that any late payments of these fees “shall bear interest at the Prime Rate plus 2% per annum”. This suggests the agreement has subsequently been changed with any arrears now attracting a substantially higher interest rate.

Convoluted settlement plan

To avoid the flow of funds between the parties to settle the various obligations, they have agreed a convoluted manner of ensuring settlement through subscription in the rights offer process.

It says the ARC Investments board has determined this is “the most commercially advantageous manner to do so”.

The rights offer is being fully underwritten by parent ARC.

Fund management fee

In the pre-listing statement, ARC Investments disclosed that the fund management fee payable to the general partner (UBI) is calculated as follows:

i. “Where the Opening Invested NAV [net asset value] is below R10 billion, 1.75% per annum on the average of the Opening Invested NAV and Closing Invested NAV of that Quarter;

ii. Where the Opening Invested NAV is between R10 billion and R15 billion, the higher of the amount determined in terms of (i) and 1.5% on the average of the Opening Invested NAV and Closing Invested NAV of that Quarter;

iii. Where the Opening Invested NAV is above R15 billion, 1.25% on the average of the Opening Invested NAV and Closing Invested NAV of that Quarter, will be drawn down from the ARC Fund. The Invested NAV will be adjusted for investments and realisations during the quarter”.

It says the fee is “in consideration for the General Partner’s obligation to maintain the ARC Fund’s B-BBEE credentials and management responsibility for the ARC Fund in terms of the Partnership Agreement”.

Fees to date

Since listing in 2017, including the sum to be settled following the rights offer, ARC Investments will have paid a total of R453 million in fees to UBI (R94 million in the first 10 months, R153 million in the year to June 30, 2019, and the R205 million from the rights offer; figures rounded).

There is a separate “Performance Participation” structure that uses convertible C shares to further incentivise UBI for annual growth in NAV.

At a market capitalisation of R2.86 billion on Tuesday, the rights offer equates to over a quarter (26%) of the company’s value. Astonishingly, the management fee for the past year comprises 7% of market capitalisation.

The shares are down by two thirds since listing in 2017.

Investors have made it clear they do not value the business at anywhere close to the amounts published by the directors. As at end June, ARC Investments reported intrinsic portfolio value of R11.139 billion.

That means the shares are currently trading at a discount of 74% (or around 70% to the published net asset value per share). While it is common for investment holding companies to trade at a discount to the sum-of-the-parts, these levels are extreme.

It remains to be seen how many minority shareholders, including the Public Investment Corporation with 13.4% of ARC Investments, will take up their rights next week.

Listen to Ryk van Niekerk’s July 30 interview with ARC’s Johan van Zyl:

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COMMENTS   17

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One can buy the stock cheaper directly from the JSE than the rights offer ‘discounted’ price.

I thought I would give this share a chance but soon saw it was a get richer scheme for the royal family. Just as his mining company was a few years ago.

I have to thank – can’t remember who – a Moneyweb comments contributor who before listing made mention of the Management Fee, so besides all the pomp and ceremony and this been Patrice, I just on that comment alone decided to not take part in the IPO.
Thank you MW contributors saved me some pain!
After all the reading, I’m of the conclusion that this is another rent seeking vehicle to make the 1% more rich, better alternative would be a Sygnia or Satrix ETF.
To Think Patrice styles himself on Buffet – shame Buffet has been used far to many times as an association – he is nowhere near Buffet.

I would still like to see what Patrice Motsepe’s actual contribution to the Solidarity Fund was.

Structured looting, nice.

Well done Hilton for highlighting that ARC’s management fee is 7% of market capitalisation for the last year, the comparable figure at Remgro is 0.03% so ARC is charging 233 times more than Remgro

“Convoluted plan” says it all.

Motsepe following Wiese – “Shareholders are useful irritants” – – – and we all know what happened to Wiese.

But, he is in good company – Cyril keeping him safe – for now.

All I want is to buy into Rain and Tymebank but a deeper look into this patent company, which also has a stake in EOH scares me. I’m staying away from this.

Patrice certainly paid attention to Sanlam’s ability to charge…this is a sophisticated form of wealth transfer. Anything to do with patrice or rain I am happy to miss. Tried rain and spent 10 days without connectivity while they figured out the problem. Thanks but no thanks

Seriously. Who buys this $hit ?

Motsepe with van Zyl…an alliance from Sanlam that actually dont care for investors or shareholders…

Ahh the BEE Co run by a Johan and Johan. Both of which were senior execs of Sanlam when Patrice scored big on shares, and are now scoring at ARC on the back of those shares…

also important to remember that J&J together with Pat are the ones calculating the NAV that they charge their fee on…read any book by Damodarun and you’ll see that this exercise in subjectivity favours one party. What number would you like?

It’s pretty clear cut to be honest. Notwithstanding the increase in the arrears interest rate, shareholders should be aware of the fees.

The disconnected between NAV and market cap is for the risk of the public shareholders and is exacerbated by the market.

The NAV is audited and independently verified, the discount carried in the market cap is because the market knows about the fee structure amougst other things and is willing to sell their shares at a 70% discount.

If anything the fact that ARC are willing to take shares (via underwrite) in lieu of cash payment for the management fee supports the notion that the market has undervalued the listed shares, significantly.

Yes and ARC are so cash flush, they had to rely on a R2bn Sanlam financing facility to pay for the R1bn Alexander Forbes acquisition at the beginning of the year and to pay their capital contribution to the newly established African Rainbow Life. And they also need to use that facility to pay for their asset management acquisition. Go read the Sanlam interim results – the devil is always in the detail.

Their NAV journal entries are as realistic as the revaluation journal entries in property companies.

Nice game : boys, we need to boost the income going through the tax laundry scheme in Mauritius – let’s value RAIN at say R14b. Nice jump in fees for the cost of a journal entry

But that is 50% more than Telkom’s valuation…

End of comments.

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