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The emergence of permanent capital vehicles on the JSE

Long4Life, Universal Partners and Ethos Capital Partners.

Standard Bank acted as joint financial advisor and joint bookrunner to Brian Joffe for the R2 billion listing of Long4Life Limited on the JSE, an investment entity that will seek investments with a lifestyle focus.

Listed investment holding companies have a long history of trading on the JSE. Remgro, PSG, Brait and HCI are some examples of the longstanding listed investment holding companies. 

The past 24 to 36 months have seen a number of new investment vehicles listing on the JSE. These entities have raised cash on the bourse either as a special purpose acquisition company (“SPAC”) or an investment entity, in terms of s15 of the JSE listings requirements. 

In 2013, the JSE amended its listings requirements to allow the listing of SPACs. A SPAC is a clean, listed cash shell, with a specific mandate to acquire assets. At the time of listing, the company should not have any operations nor any contractual arrangement to acquire pre-identified businesses. It has 24 months in which to make acquisitions and satisfy the basic JSE listing criteria, failing which cash is returned to shareholders.

While SPACs are relatively new to the South African market, these entities have existed internationally since the 1990s. The most prolific year for SPACs in the US was 2007, when 23% of all IPOs on the New York Stock Exchange were from SPACs, raising a total of more than US$12 billion.

Traditionally, the raising of capital for investments in private entities was done through private equity funds. A listing, however, provides a permanent source of capital for managers/promoters which can be tapped again through follow-on issuances more efficiently than the traditional pools of liquidity on which private equity has historically relied. Instead of investing in businesses for a defined period (usually five to seven years) with the aim of returning a profit, a permanent capital vehicle’s (“PCV”) approach is growth over the medium-long term, unconstrained by exit pressures and challenges in raising capital for new funds.

Listed PCVs also allow the public to co-invest with sophisticated managers and financiers, an opportunity that has traditionally been restricted to institutional and private equity investors.

The rise in recent PCV listings on the JSE can be attributable, inter alia, to:

  • Entrepreneurs who believe they can create long term value to a portfolio of investments in the listed environment;
  • Increased opportunities in the renewable energy sector (as well as appetite from investors);
  • Access to a large pool of capital given South African institutions are broadly long cash; and
  • The scarcity of new listings in which to invest.

Although SPACs are specifically designed to raise capital on the JSE and undertake acquisitions, it is not appropriate for funds or entities with existing assets. Rules are also rigid in that shareholder approval is required for all acquisitions and to approve changes in the company’s acquisition criteria. Section 15 of the JSE Listings Requirements, however, allows investment entities to list on the JSE subject to certain criteria, notwithstanding that it does not comply with the main board listing criteria. This route allows for greater flexibility, with the JSE also amenable to certain concessions, provided the issuer is led by an experienced management team and board, with prior M&A or operating experience.

Universal Partners Limited and Ethos Capital Partners Limited are two s15 investment entities that listed on the JSE in 2016. Although the investment mandate of each was unique, both highlighted the proposition for investors to access a unique portfolio of unlisted assets through a liquid vehicle, as well as the backing of an experienced management team.

Given the 24 month investment window for SPACs and targeted long term investment horizon of s15 investment entities, investors have been urged to adopt a “wait and see” approach. Whilst this has translated into relatively muted performance of most listed PCVs, we believe the trend of listing such vehicles will continue given the pool of capital available in a listed environment. Promoters and Private Equity Funds have expressed their desire to tap the deeper pools of institutional liquidity, with the market having appetite to invest in this emerging asset class.

Further structuring and innovation is also likely to continue in search of competitive advantages over private equity funds, black empowerment groups and other listed investment holding companies.

Long4Life

Brian Joffe is well documented as one of South Africa’s most successful businessman, growing the Bidvest Group from a R182 million company to a multinational corporation with a market capitalisation of approximately R140 billion (prior to the unbundling of its Foodservices business as Bidcorp). Following the relinquishing of his executive roles at Bidvest and Bidcorp, Joffe expressed a desire to form a new listed entity that would pursue investments in areas such as education, restaurants, sports, the outdoors, beauty and retirement.

Long4Life listed on the main board of the JSE on April 7 2017 as a s15 investment entity.

Joffe committed R100 million of his own capital as part of a total of R2 billion raised through the IPO. The full quantum raised was secured via pre-commitments ahead of the listing.

Long4Life’s objective is to achieve superior returns over the medium to long term by investing in companies that have a proven track record, strong cash flow generation, are capital light and led by experienced and entrepreneurial management. Consideration will also be given to opportunities relating to underperforming businesses. Long4Life aims to adopt an entrepreneurial, nimble and innovative approach to transactions.

Notwithstanding the lifestyle focus, the company aims to retain the flexibility to make use of its directors’ networks and participate in opportunistic investments as and when they arise.

Despite the political and economic turmoil in South Africa that transpired in the week preceding the IPO, Long4Life closed at R6.73 on its first trading day, substantially above its listing price of R5.00. The share price continues to trade at a premium to NAV, the market clearly expecting Joffe to replicate his success at Bidvest.

Rattan is vice president, Corporate Finance at Standard Bank.

This article first appeared in DealMakers.

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