Thirty year old private equity company, Ethos, intends to list on the main board of the JSE in August.
Ethos Capital will be listed in the Financials/speciality finance sector of the JSE and will provide investors with the opportunity to invest into a portfolio of unlisted investments managed by Ethos Private Equity.
The company plans to raise R2 billion and will issue up to 200 million ordinary shares at R10/share to selected individual and institutional investors in terms of a private placement.
Historically Ethos has raised its funds through the traditional private equity market. Over time it has raised six funds, each with a specific mandate. Fund VI is 80% invested and investments include the likes of tissue company Twinsaver, telecom tower company Eaton Towers, logistics company RTT and motor parts company Autozone.
It plans to begin the capital raising process for Fund VII later this year or early 2017. Similar to Fund VI Ethos will target private companies with an enterprise value of between R1.5 billion and R7 billion, a market-leading position and strong cash flow.
There are two reasons for changing the funding strategy, says Peter Hayward-Butt, CEO of Ethos Capital – a push factor and a pull factor. “Investors are narrowing globally, that is the first. And while there are fewer of them, they want us to offer a more diverse product set.”
“We are shifting our vision from a single-product, pure-play private equity model into a diversified alternative asset manager,” adds Stuart MacKenzie, CEO of Ethos Private Equity (pictured below).
Ethos has launched the Ethos Mid Market Fund 1, chaired by Sonja de Bruyn Sebotsa. This is a black-owned private equity vehicle that will target companies with an enterprise value of between R500 million and R1.5 billion.
“This takes us back to a deal size that we did in Fund III and IV,” says MacKenzie. “We see a lot of these but without a home we turn them down. This new fund allows us access to a broader range of deals.”
In addition Ethos Private Equity has acquired a High Yield and Mezzanine Credit platform from Stanlib and intends to launch a closed-end mezzanine debt fund.
“A mezzanine strategy sits between debt finance and equity finance and can act as a shock absorber between deals,” he says. We have built a platform to enable these strategies. A listing at this point would give them a headstart – a mid-market fund is a difficult proposition to launch at this time.”
The additional exposure brought by being listed as well as the extra liquidity are additional advantages. Internationally about 20% of institutional money is invested into the ‘alternative’ investment arena. In South Africa that number is closer to 2% says Hayward-Butt. “Private equity is typically a very illiquid investment, but our returns have been fantastic.” A R1 000 investment into the JSE Alsi 20 years ago would have returned 14.7%. Ethos has returned 20.9% or R44 000, net of fees, to its investors,” he says. “Retail investors would love access to these returns. But historically you need big cheques and to tie up your money for ten years. We are presenting a way to invest alongside Ethos, that is more liquid.”
Private equity contemporary Brait made the decision to list on the JSE in 1998 to raise capital and provide investors with liquidity. However in 2011 it changed its business model from a traditional private equity fund manager (which holds its investments for five to seven years) to an investment holding company, which holds investments such as Virgin Active and New Look, and formerly Pepkor, for as long as strategically necessary.
“We have no intention of changing our strategy,” says MacKenzie. “We are active managers and get involved from day one. The companies we target all have optimisation possibilities. We work with these entrepreneurs and family-owned businesses to scale up through the growth curves. Our track record demonstrates that this model works well for us.”
Ethos Capital (the listed entity) will have its own board of directors, chaired by Yvonne Stillhart, which will be independent of Ethos Private Equity. Ethos Capital’s investment committee will comprise former Rand Merchant Bank CEO Mike Pfaff and CIO Derek Prout-Jones, both of whom have significant experience in the private equity industry.
The investment committee will review investment opportunities and make recommendations to the Board, which will make the ultimate investment decision.
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