Roundup December 2021 – Festive Season Edition Newsletter

*An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance.

There are about 300 listed companies in South Africa, whereas the private market allows access to over 1,500 mid-tier alternatives. “Not only are there more companies in the private market to capitalise on mispriced opportunities, but there is also far more diversification to benefit from,” says Farhad Khan, a Partner at Old Mutual Private Equity.

The private market also represents great opportunities to get into high-growth markets early (long before they are ready to IPO).

Also refer to article below: SA lost 250 listed companies since 2000 – there are now almost the same number of listings as before 1994

Internationally, the allocation to private equity is up to 20%In South Africa this is below 2%

According to Khan, this continued under-allocation to unlisted equity represents a missed investment opportunity, but he stresses that selecting the right private equity manager is critical for success. “Internationally, the allocation to private equity is up to 20%, whereas in South Africa this is below 2% despite access to several good quality, investable, highly cash-generative private companies,” he says. The Yale Endowment Fund –one of the best-performing investment portfolios in American higher education – performed a famous study on the value of alternatives in an investment portfolio. “Following outstanding performance thanks to the asset allocation, today up to 70% of its portfolio is allocated to alternatives with less than 3% in listed equities. It has returned 11.8% in dollar terms per annum on average over the last 20 years compared to the 5.2% of the listed market,” he says.

SA lost 250 listed companies since 2000, there are now almost the same number of listings as before 1994Business Insider SA   Feb 13, 2020

The number of listings have dwindled to levels last seen during the end of apartheid. In 1993, there were 305 listed companies.

According to a report by the market information service  TimBukOne, there are currently only 344 listed companies on the JSE – down more than 40% from 2001. In 2001, there were 601 listed companies.

Returns shows some eye-opening results

What R100k in SA’s biggest equity funds five years ago is worth today? Moneyweb 25 Nov 2021

Contrasting total returns shows some eye-opening results …

In this exercise, Moneyweb compared only equity unit trusts with R10 billion or more in assets under management as per Association for Savings and Investment South Africa (Asisa) data to end of June 2021. Importantly, this included ‘balanced funds’, as well as so-called ‘low-equity’ funds  – as these are realistically the only option for retirement savers under the limitations imposed by Regulation 28.   One may argue that funds with assets of between R1 billion and R10 billion would, because   of their size, find it easier to outperform the larger funds. This is not untrue, but performance   is obviously not uniform across the board.  Unsurprisingly, the three funds in this comparison that track global indices have far outperformed the rest. R100 000 invested in the CoreShares S&P 500 – which is unit trust wrapper that tracks the exchange-traded fund (ETF) – would be worth over R236 000 today.  That’s a return of 137%.  One may argue that this performance was due to the weaker rand, but the currency has only depreciated by 12% against the dollar since November 2016 (R14.08:$1).  Locally, the Fairtree Equity Prescient Fund has well-outperformed all others in this comparison, with a return of 84%. Sticking the R100 000 in the market and simply tracking the top 40 (using the Satrix 40 Portfolio) would give you R167 790 today – a return of 68%.

It is astonishing that the Allan Gray Balanced Fund has barely outperformed its Money Market Fund (included in this comparison as a baseline as it’s the largest following Absa’s closure of its fund). This performance is practically indicative of any money market fund.

Perhaps more alarming is that the Allan Gray Equity Fund has underperformed both its Balanced Fund and its Money Market Fund.

Stats SA reports consumer price inflation of 22.7% over the last five years (from December 2016). For retirees, this number is ostensibly 22.9%. For those who are more well-off, inflation over the period has almost certainly been close to 10 percentage points higher – in other words, 33%.

What this exercise does show is just how destructive the limitations due to Regulation 28 can be when it comes to performance (with Regulation 28, equity exposure is limited to 75%, foreign investment exposure is limited to 30%). Being forced into a Reg 28-compliant balanced fund in a pension investment or retirement annuity has a major impact on returns that is not completely offset by the tax advantage.

This comparison is not, however, about punting offshore investment at the expense of everything else. But with a stagnant economy and a weakening currency over time, investors ought to be carefully considering their options.

Certainly makes one think.

Private Equity and B-BBEE Ownership Compliance Solutions

Broad-Based Black Economic Empowerment (B-BBEE) Ownership has, over the past decade, become an integral part of the life of companies operating in South Africa.

Following the amendment of the BEE codes in 2015, companies now face the real threat of B-BBEE rating downgrade in cases of noncompliance with the sub-minimum requirement of the target on the Ownership element. The question becomes “does the B-BBEE rating matter?”. The answer lies in “How much does the rating affect your business’ ability to compete for work and ultimately your top line?”

Section 3.10 of the BEE Amended Codes of Good Practice regulates Private Equity Funds, and at an ownership level provides a unique way for companies to comply with this element of the scorecard.

Section 3.10 of the amended Codes of Good Practice states that a Measured Entity may treat any of its ownership arising from a Private Equity Fund as if that ownership were held by black people, subject to the Private Equity Fund meeting the following criteria:

3.10.1.   At least 51% of any of the Private Equity Managers’ exercisable   voting rights associated with the Equity Instruments through which   the Private Equity Fund holds rights of ownership, must be held by   black people.3.10.2.  At least 51% of the Private Equity Fund’s Executive   Management and Senior Management must be black people.3.10.3.  At least 51% of the profits made by the Private Equity   Fund Manager after realising any investment made by it   must, by written agreement, accrue to black people.

To summarise the requirements of Section 3.10 above, a private Equity fund must be:B-BBEE owned and managed companyThe PE Fund manager must seek to invest at least 51% of the value of funds under management in companies that have at least 25% direct black shareholding.

Ingenious Equity is a 100% black-owned investment advisory firm with one of it’s niche focuses being B-BBEE compliant Private Equity fund structures. Over the last 5 years, Ingenious Equity has designed and executed over 40 B-BBEE compliant fund and other related structures.

OFFICE RELOCATION

Thank you for your ongoing support and for entrusting nREACH I CAPITIS I LAYSAN to manage your investment.  In order to ensure that we continue to deliver world-class service as well as to accommodate our growing business. nREACH I CAPITIS I LAYSAN will be moving to new office premises as of 1 December 2021. While we continue to observe and manage the operational efficiencies during the time of relocating, we will be fully operational at our new offices as of 1 December 2021.  Please update your records with our new address: BLOCK A, Unit 4, First FloorSussex Office Park473 Lynnwood RoadLynnwoodPretoria

As a result of adapting to the “new normal”, kindly note that we will no longer have a Telkom landline telephone number and that the rest of our contact details remain the same:Website: www.nreach.co.za

Conclusion

Alternative Assets Coming of Age The shift towards investing in alternative assets is not only in South Africa, but a worldwide growing trend.  The main benefit of including alternative asset classes in your investment portfolio is to have sufficient diversification to reduce risk and enhance returns. Dividend payments When comparing the performance of alternative investment assets to listed shares on the JSE, “Alternative Assets” in general continues to hold value and pay yields. We have been blessed in that our income portfolios were not disrupted as a result of the Covid-19 pandemic.The “Fixed Income” generating portfolio, including the utilities, farming and solar investments (all in non-discretionary consumer spending sectors), consistently paid the expected yield throughout this tough year and we do not foresee any reason why this will not continue up until maturity of these investments.     Deployment into pipe-line of “Investee Companies” and Assets Under Management (AUM) With our AUM reaching R750 million we now rank under the top-10 VCC Funds and already manage an investment portfolio of 22 diversified investments across various asset classes and sectors. We have a proud record of deploying all capital within 60 days, due to our deep “investment pipeline” and our ability to continue building and expanding a robust investment range of Investee Companies to invest in.

Contact us for more information