You could say African Rainbow Capital has been deeply unpopular since coming to market in 2015. Yet the company’s major investments include potentially lucrative assets such as rain, TymeBank and phosphate group Kropz, and it has smaller holdings in Capital Legacy and GoSolr. Its latest announcement was a R750m rights offer to shore up capital, at R5 a share — which has drawn derision from the market, partly given the company’s stated intrinsic NAV of R11.41 a share.
The FM spoke to executive director Johan van der Merwe.
What do you plan for the cash?
We’ll invest a little bit in rain, a bit in TymeBank overseas, and smaller companies where significant growth opportunities present themselves. It’s capital for expansion and we want to make sure we don’t run into cash flow problems. We find ourselves almost compelled to sell certain businesses because we need the cash for others.
Why raise capital now if you are thinking of delisting?
A capital raise is a very separate decision which should be taken on its own.
There’s a view that this offer damages minorities because it doesn't allow shareholders to sell their rights or apply for excess rights. Your thoughts?
As the underwriter of the rights issue, we don’t charge any fee. Consequently, we feel it's reasonable to not allow shareholders to sell any rights or apply for any rights. They are of course welcome to participate in the rights issue on equal terms.
It all goes back to the issue that you’ve had since the beginning: the discount at which you trade to your stated NAV. Why raise cash at such a deep discount?
Why’s that a bad thing? We are raising funds at the existing market price. We don’t determine the market price – the market does. People previously said: “You inflate your NAV because you get paid a fee based on your NAV and we don’t believe your NAV because the only reason you’re doing it is because you want to get a bigger fee. That’s why the market says you’re worth much less.”
So what we then did was say: “OK, we’re not going to charge a fee based on our NAV but on what it’s costing us plus 5%.” Every time we’ve sold something out of the fund we’ve sold it at NAV or higher — so why does the market say we are worth half our NAV?
One of our contributors said on X: “Unless you truly hate money and desperately want to part with it, why do you hold shares in ARC?” What do you say to that?
Well, we’ve always said we’re a permanent capital vehicle with long-term capital holders. We just have to demonstrate where these things will end up one day. The mere fact that we are following all our rights and that we’re underwriting all the others is because we believe in the underlying investment. We are happy to engage with your contributor on Twitter in person, but he is unlikely to accept the invitation …
You changed the management fee because people hated it so much — but in hindsight was it not the wrong thing to have from the start, because it permanently soured people’s views of you?
No. From the time we listed we said: “We are going to have this management fee and we will revisit it in five years’ time.” And that’s exactly what we did. If you start from day one you don’t have any investments, you only have cash, so there’s a lot of work that’s got to be done. And at the time we came up with the fee, Patrice [Motsepe], through Ubuntu-Botho Investments, made ARC black-controlled and -owned — so [as a BEE partner] we could get access to businesses we wouldn’t otherwise have had access to. But now if you look at Patrice’s vehicle, any other investor can buy and sell whenever they want to, but Patrice cannot because the whole ethos is BEE, so we said: “The only way to be able to compensate him for having a lock-in forever was to earn some fees.”
I must say, we’re a little disillusioned by the market: first they were really unhappy about [the fee] and then we changed it and it’s made no difference. If one looks at ARC with over 70% held by quite strong hands and another 14% held by the Public Investment Corp, then you’ve got 12%-15% free float. Asset managers can’t buy it. So we’ve asked if it makes sense to remain listed.
Well, does it?
We’ve considered it for the past three years. [Delisting] is definitely on the table again.
If you did decide to delist, is it still possible that the businesses you are building within ARC may list down the line?
Exactly — whether we’re listed or not doesn’t really matter how we exit certain investments. In all of these businesses we’ve got significant partners and probably all of them will at one stage say: “How do we realise these investments?”
Would you be able to build them up and raise capital, if you were private?
The thing is we’ve been approached by people who’ve said: “We would like to take a stake in ARC but we’d like you to be unlisted.” There’s actually more money available in the unlisted market for our type of investment portfolio. In hindsight it probably was not the right thing, for us to list.
That’s a bit depressing. Was there a way to have done your listing differently so there was better interest?
I don’t know. If we were the only investment holding company trading at a significant discount, I would have asked: “Is there something we’re doing wrong?” But you can go from Remgro to Ethos and they are all trading at huge discounts.