ARC Investments to Delist from JSE After Reporting R1 Billion in Management Fees

ARC Investments, predominantly owned by Patrice Motsepe’s Ubuntu-Botho Investments (UBI), aims to delist from the JSE at a 21% premium compared to its trading price over the past month. This pricing reflects a 23% discount to the net asset value as disclosed in the company’s results on Tuesday.

This development has stirred concerns among investors, with many raising questions not only about the premium but also about ARC Investments’ evaluation of its core assets.

Read: ARC eyes JSE delisting

Its 21.76% interest in the telecommunications company Rain is appraised at R5.639 billion, while its effective stakes of 15.9% in TymeBank (South Africa) and 12.6% in Tyme Global (through ARC Financial Services Holdings) are valued at R2.25 billion and R1.19 billion, respectively. This portion in ARC Financial Services—comprising shares in Alexforbes, Sanlam Third Party Asset Management, and Capital Legacy—represents nearly a third of the fund’s valuation (31.9%), tallying R7.2 billion.

The bid for the 40% of ARC Investments which UBI and related entities do not yet own estimates the fund’s value at R14.8 billion.

However, the combined valuation of the financial services sector and Rain stands at R12.8 billion, which illustrates why shareholders might be hesitant to agree to the sale of their shares.

The business process outsourcing assets are pegged at R1.9 billion, while holdings in mining, construction, and energy approximate another R2.8 billion. The remaining legacy financial services interests (outside of the ARC Financial Services framework) are estimated at about R2.7 billion. This total includes a R1.05 billion holding of its own shares. Consequently, the company is aware— and has been for years—that its shares are undervalued.

Premium is only part of the issue

The so-called ‘premium’ is merely part of the problem.

What shareholders find even more unsettling is the considerable amount paid in fund management fees by the listed entity to its general partner.

Since its listing in September 2017, it has been disbursing an average of R200 million annually in fund management fees to the general partner, UBI.

Over the four financial years from July 2018 to June 2022, it allocated a total of R800 million in fees:

• Year ended 30 June 2019 – R156 million;
• Year ended 30 June 2020 – R206 million;
• Year ended 30 June 2021 – R213 million; and
• Year ended 30 June 2022 – R225 million.

In 2020, it controversially stated its intention to allocate R205 million of the R750 million it sought to raise via a rights offer to settle fund management fees owed to UBI.

During an interview with the Financial Mail’s Giulietta Talevi, ARC Investments co-CEO Johan van der Merwe argued that the rights issue represented “only 7.5% of the company” in light of its declared net asset value (NAV) of R10 billion.

Read: ARC Investments plans to allocate R205m from rights offer to management fees [Sept 2020]

In its pre-listing statement, ARC clarified that part of the fund management fee compensates the General Partner for maintaining the ARC Fund’s B-BBEE credentials.

It also stated that the fee is utilized to effectively manage the fund.

Van der Merwe affirmed to Talevi: “Our team, consisting of about 20 individuals, incurs costs for rent, travel, and operational activities—all of which need to be compensated. That is what the fee is designed for.”

He added that this is a “standard fee structure, and if you analyze private equity—where this is almost akin to a listed private equity vehicle—private equity typically claims 2% and 20% [on outperformance]. We apply 1.75% on a sliding scale and 16% on outperformance.”

Shortly thereafter, ARC Investments reversed its stance and announced it would “cover the fund management fee using internal cash resources.” The company stated this resulted from the board’s decision to “nullify” the intricate set-off agreement whereby the fee would be resolved through subscription in the rights offer.

Read: ARC Investments reverses rights offer stance [Sept 2020]

This adjustment aimed to prevent capital from flowing from ARC Investments to general partner UBI, which subsequently remits 95% of the fund management fee to (unlisted) African Rainbow Capital as an “investment services fee.”

In the rights offer circular, ARC stated that the board decided the set-off agreement was “the most commercially advantageous approach to proceed.”

It anticipated investors would somehow accept that the rights offer proceeds and the remaining capital in the business would be treated as separate.

Shareholder pressure seemed to influence the outcome. In 2021, the company announced that “the Company and the General Partner indicated that they would review the fee structure of the ARC Fund after five years.”

“The global and domestic landscape has shifted significantly since the listing, prompting discussions between both parties about potentially fast-tracking this review.”

Read: ARC Investments agrees to revisit management fee structure [Mar 2021]

In September 2022, it introduced a new methodology for fee calculation: it could either implement the ‘current’ fee (between 1.75% and 1.25% of invested net asset value) or “the actual cost of managing the ARC Fund, including the Services Fee charged by ARC and other direct costs incurred by the General Partner, plus a 5% markup thereon (excluding VAT).”

It noted that this would never surpass the fee outlined at the time of listing. At a shareholder meeting, 99.04% voted to approve this adjustment.

Recent fees significantly reduced

The fund management fees over the last two financial years have significantly dropped, totaling R98 million (year ended 30 June 2023) and R112 million (year ended 30 June 2024). Overall, the combined fee of R210 million is roughly half of what was previously disbursed.

Cumulatively, ARC Investments has paid over R1 billion in fees to its general partner. An additional R65 million is owed for the six months ending 31 December 2024. By the time it delists, it’s anticipated it will have paid nearly R1.1 billion in management fees to its parent.

It’s curious that co-CEO Van Der Merwe asserted to the FM’s Talevi in 2020 that ARC and UBI were not reaping “substantial profits” from the fees; the figures do suggest a different narrative.

“The fee has been a constant since the beginning. Some may not have favored it, but those who didn’t shouldn’t have purchased shares.”

Listen to this SAfm Market Update podcast where host Jimmy Moyaha engages with ARC’s co-CEO Johan van Der Merwe about the group’s plans for relocation and delisting from the JSE:

https://iframe.iono.fm/e/1538111?layout=modern” width=”100%” height=”170″ frameborder=”0

You can also listen to this podcast on iono.fm here.

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