The Public Investment Corporation (PIC), whose clients include the Government Employees Pension Fund (GEPF), celebrates its 110th anniversary this year.
The PIC is the largest asset management company in Africa, with investments spanning domestic listed investments (85.93%), domestic unlisted investments (5.17%), and offshore and rest-of-Africa investments (8.9%).
For the financial year ended March 31, 2021, assets under management increased to R2.3 trillion (2020: R1.9 trillion). This constitutes a small increase from the 2019 figure of R2.1 trillion – but the disruption to the investment environment caused by Covid-19 is now behind the corporation.
The GEPF is the PIC’s largest client, comprising 89.24% of assets under management.
Profit for the year amounted to R528.2 million (2020: R189 million), and total comprehensive income for the year was R535.9 million (2020: R198.8 million) after taking into account the share of comprehensive income of equity-accounted investments of R7.7 million (2020: R9.8 million).
Dividend income amounted to R18.7 million (2020: R29.3 million), and interest income amounted to R176.9 million (2020: R200.3 million).
No dividends were declared in the current financial year. The dividend of R99 million declared in 2020 has not yet been paid.
Financial assets at fair value
The PIC does not disclose the details of assets that it holds on behalf of clients, and therefore it is not possible to ask any questions, such as whether it holds bonds in any struggling state-owned entities on behalf of the GEPF.
One would then expect that the GEPF will provide all the details of its investments, including the Isibaya Fund schedule, and be in a position to confirm that it is in agreement with all the valuations placed on the investments held on its behalf by the PIC, including the expected credit losses.
The PIC disclosed that the credit rating for the cumulative amount of bonds and listed shares is R2.1 trillion (2020: R1.6 trillion). An amount of R1.2 trillion (2020: R1 trillion) has an AAA credit rating, and only an amount of R137 million (2020: R124 million) has a B credit rating.
The board of directors noted that: “The impact of the Covid-19 pandemic has caused a significant deterioration in economic conditions and an increase in economic uncertainty. The pandemic is also affecting financial markets. The South African and world economy is slowly returning to normal with the availability of vaccines against the Covid-19 virus.”
New executive model
A new executive model was introduced, leading to the appointment of a chief executive officer, acting chief investment officer, chief operations officer, chief risk officer, chief technology officer and head of ethics.
The current interim board appointed in July 2019 to serve until July 2020, after which its term was extended by another 15 months.
During the year under review Irene Charnley, Sindi Mabaso-Koyana, Maria Ramos and Bhekithemba Gamedze “ceased to be members” of the board.
The PIC emphasised that they were “seamlessly replaced” and that “there never was an exodus” of non-executive directors”.
The PIC has a:
- 46% shareholding in Harith Fund Managers (2020: 46%);
- 30% shareholding in Harith General Partners (2020: 30%);
- 30% shareholding in Bophelo Insurance Group or ‘BIG’ (2020: 30%); and
- a 7.31% shareholding in the SA SME Fund (2020: 7.65%).
Harith Fund Managers and Harith General Partners both have a financial year-end consistent with that of the PIC (March), while BIG and the SA SME Fund have theirs in February.
Nzalo Insurance Service and Bophelo Life Insurance are currently going through liquidation.
The PIC was given an unqualified audit report by the Auditor-General (AG) of South Africa.
However, the AG made some concerning observations, including:
- An enhanced due diligence (EDD) was not always performed on politically exposed persons (PEPs) as required by established policy “due to misalignment between the PEP policy and FICA Risk Management and Compliance Programme (guideline)”. The AG added that: “The PEP policy requires EDD to be performed for all PEPs identified, whereas the guideline requires EDD to be performed when PEPs are identified as high risk.”
- Management did not always implement effective financial systems of internal controls to ensure accurate disclosure notes to the financial statements, nor adequate measures to ensure compliance with applicable legislation.
- The internal control system failed to prevent the incurral of irregular expenditure of R7 250 000 paid to a former employee.
Implementing the recommendations of the Mpati Commission
The Mpati Report resulting from the Judicial Commission of Inquiry into Allegations of Impropriety at the PIC was released in March 2020.
More than a year later, the PIC is still implementing the commission’s recommendations. It is doing so with the assistance of an advisory panel led by retired Justice Yvonne Mokgoro; “the board will crystallise those aspects of the Mpati Commission recommendations that merit forensic investigation”.
“The PIC is working closely with law enforcement agencies to ensure that those implicated are brought to book” and implicated employees “were subjected to disciplinary processes”.
However, high-earning executives are still on suspension.
Matshepo More, who was the CFO earning R10.5 million per annum, was suspended on full pay in March 2019. For the year ended March 31, 2021, More earned another whopping R6.9 million.
Roy Rajdhar, an executive earning R7.6 million per annum, was suspended on full pay. He resigned on June 8, 2021. In 2021 Rajdhar drew a salary of R7.3 million, which included a short-term incentive of R1 million and a long-term incentive of R1.5 million.
PIC CEO Abel Sithole explained that it is necessary to put someone on suspension to give them time to deal with any inquiries, and to not disrupt business processes.
Sithole also said that when employees are suspended, their pension remains intact.
Sithole did confirm that certain matters have been handed over to the National Prosecuting Authority (NPA).
Why the fuss about 4%?
Sithole noted in the PIC’s integrated report that: “The predominant concerns the [Mpati] Commission raised relate to past investments made in the PIC’s unlisted Isibaya portfolio.”
The Isibaya Fund invests in high impact areas for socioeconomic development. Unfortunately, not all the equity investments and loans were made for the right reason.
The Mpati Report questioned the PIC’s “thoroughness in conducting its due diligence as well as its assessment of cumulative and reputational risks”, granting a single party an investment in more than one project, and found that the PIC undercut the objectives of the Isibaya Fund.
Sithole however points to the small size of the Isibaya Fund, that it comprises only 4% (R70 billion) of the total investments, and that “most of the PIC’s investments – 96% – were and are not the subject of allegations of impropriety”.
Part of the 96% will include the investments in Steinhoff and Ayo Technology. The PIC refers to these as “distressed investments”, and is “making a concerted effort to find resolution”.
If an asset manager with more R2 trillion of investments thinks that a badly managed fund only constitutes 4% of all the assets under management, there is a problem.