ARC: shareholders, can we have some more please?

• South Africa
• African Rainbow Capital, B-BBEE, Private equity, Rights issue, Rights Offer
• September 15, 2020

African Rainbow Capital (ARC) Investments was “pleased to advise shareholders” that the board resolved to undertake a rights offer. That means they will tap into shareholders for another R750 million, which I’m sure shareholders can’t wait to give them after the ARC share price has dropped nearly 70% since listing.

I’ll bet the board was pleased. So is anyone else involved in the ARC incentive structure for the fund managers, since part of the proceeds will be used for “settling the outstanding fund management fee” – sorry what?!?

Let’s take a step back here. Shareholders believed in the story when this company listed. It made a lot of sense:

• Patrice Motsepe’s backing
• Rockstar management team of ex-Sanlam executives
• Great strategy of offering portfolio companies a combination of empowerment credentials and a genuine cash investment
• Evergreen listed structure (vs. a closed-end private equity fund – this means ARC isn’t forced to sell any of its assets as shareholders can realise value by selling the listed shares instead)

Delightful. Brilliant. Everyone rushed to get in on the IPO action when it listed.

Where did it go wrong?

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Doing deals like a Jack Russell on heat

ARC started as a private fund. Keen to deploy capital, management bought a raft of investments that left the market scratching its head a bit. Huge capital was deployed into everything from agriculture to financial services.

ARC made it onto every list of prospective investors in a transaction because they would look at damn near anything. It was extraordinary.

Then, a portion of the portfolio was split out and listed in a Mauritian structure, which is why you’ll need to do some Google heroics to actually find the correct company website for the listed entity. This is the unlisted ARC fund and this is the listed company.

The listed fund included a juicy management incentive plan that didn’t thrill the market. Being paid to manage money is fine, but market sentiment wasn’t positive and felt that the company would offer better returns to management than shareholders.

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Shareholders, can we have some more please?

So here we are with a R750 million rights offer on the table. The money will be used to help portfolio companies “leverage their current situation”- whatever that means.

Portfolio company Rain is given as an example, which enjoys an average rating of 1.7 stars from 5,174 reviews on HelloPeter, giving it a shockingly bad Net Promoter Score of -70 which means you would probably even feel bad recommending it to the guy who bullied you in school.

A chunk of the money will also go into the deal with Sanlam’s third-party asset management businesses, which nobody would describe as the jewel in the Sanlam crown.

The shocker though is that the rights offer will settle the hated fund management fee. We have to wait for the detailed circular to be sure, but it probably means the incentive structure will be wound-up, the execs will make tons of money and shareholders will prepare themselves for the next phase in ARC’s growth.

I’m glad I sat out phase one. I’m equally glad to continue watching from the sidelines. At least some people have made money from ARC, but it’s not the shareholders.

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