The phoenix rises from the ashes, charts path into private equity

African Phoenix Investments is chasing deals after emerging from the legacy of failed African Bank.

It has been five years since African Bank Investments Limited (Abil), the parent company of unsecured lender African Bank, was placed under curatorship by South Africa’s central bank over a surge in soured loans. 

Abil was placed under curatorship, which is a bankruptcy protection measure, in 2014 – making it one of South Africa’s biggest banking collapses in more than 20 years.

During the curatorship process, the central bank separated Abil into two; a good bank, which housed performing loans of African Bank and the bank received a R10 billion recapitalisation, and bad bank, which comprised under-performing loans. Before the curatorship, Abil comprised African Bank, now-defunct furniture group Ellerines and long-term insurance group Stangen.

Abil listed on the Johannesburg Stock Exchange, trading independently from the good bank (the now restructured and profitable African Bank), and renamed into African Phoenix Investments (API). API is now diversifying into the private equity world by launching an investment fund after it recently sold Stangen to King Price for R140 million.

The sale was part of API’s strategy of shifting from being a financial services firm to an investment holding company, with a private equity exposure.

API will provide seed capital to the private equity fund to invest in unlisted businesses in sectors including telecommunications, education, and healthcare. API has set aside R1.2 billion for the private equity fund to invest in eight to 10 deals over the next three years in tranches of about R500 million. The new private equity fund is led by former API CEO Siya Nhlumayo (pictured) and Shafiek Rawoot, the former API financial director. Siya and Shafiek spoke to M&A Africa about the new private equity fund.

M&A Africa: What will be the focus of API’s new private equity fund and the kind of investments the fund will be targeting?

Siya: We are launching a black fund management structure. It would be investing in unlisted companies but not focusing on financial services, banking or the insurance sector. We are clear about buying companies that are in South Africa.

A lot of private companies are looking for a long-term investor and partner – not an investor that will try to make a return in three or five years. We are looking for companies that will take an active role in their business. And empowerment/transformation has become more critical. Investors are now committed to transformation and diversity when making investments. 

We thought a private equity vehicle was well suited. There is downside protection for the main investor, which is API, meaning that the capital that they put into the private equity vehicle – whether it’s R1 million or R500 million – the company won’t lose more than the capital it has provided. API has limited liability to the capital that they have provided.

M&A Africa: Why is the private equity fund focused on Black Economic Empowerment (BEE) and what will be the management structure?

Siya: The Department of Trade and Industry, through the BEE commission [a regulator for BEE compliance] and financial services charter [a policy document on BEE for the sector], have created provisions for black-owned and managed private equity firms to promote the entry of new black players.

API has done that. Instead of launching a BEE transaction, API has facilitated the entry of a new fund manager.  So, I, Shafiek and others, now form the black fund manager/the private equity fund. It is a fully empowered management team to execute the investment strategy. The capital to invest in companies will come from API, which launch the black fund manager/private equity fund.

M&A Africa: What kind of private equity model is API targeting?

Siya: When API deploys the capital to the fund manager/private equity fund, we want to make sure that we are a long investor in investee companies. There is no finite life to our investments. We have made the fund evergreen. There is no need to return capital to investors.

This is one of the challenges of private equity. You have a period of ten years to make those investments and sell those investments. It creates a bit of tension when you find a great investment opportunity and within five years the money has to go back to a pension fund. We want to offer an investment vehicle that is enduring for the medium to long-term.

M&A: How much is the capital set aside for investments?

Shafiek: API had a balance sheet of R1.7 billion before the preference share repurchases [to buy out shareholders that bought preference in Abil before its collapse. This will pave the way for API to launch the private equity fund]. About R500 million has gone out in terms of preference share repurchases. There is about R1.2 billion left in API once the sale of Stangen goes through.

We are looking to invest the remaining R1.2 billion in a portfolio of eight to ten investments. The average deal size would be R120 million to R150 million. But we have given a range of between R80 million and R200 million. Instead of putting the entire R1.2 billion into the fund, API shareholders have said that we must put an initial commitment of R500 million in the private equity fund to do three or four investments.

And at that point, the fund must first report to shareholders to show how the investments have performed before further capital can be committed.  Then we will go back to API shareholders to request further funding.

M&A: How unique is that model from a governance perspective regarding asking shareholder approval for the release of more capital?

Siya: Governance is unique with the black management fund. Although API is a listed company, shareholders saw the scope of what we were offering. When we come back for the next tranche of capital, API investors will vote for it and that speaks to governance from a shareholder point of view. API shareholders are represented by the board of API in managing the relationship between the fund manager and the capital provider. The fund manager has a board of its own – separate to API. 

API has an investment committee. Unlike the committees of other private equity firms whereby the committee is made by the company executives, three of the people that make up the black management fund are independent.

M&A: Is the new private equity fund sector agnostic?

Siya: We are sector agnostic. The easiest deal to make is when there is a willing seller. It becomes easier to conclude transactions or find a bigger universe of opportunities when there are sellers. Some sectors will be challenging for us. Once we get into sectors where there are commodity risks or value is being driven by commodity prices and exchange rates, it is difficult to drive a specific strategy or even enhance value.  Because of this, we are avoiding primary agriculture and mining sectors. We are looking at healthcare, telecoms, education, and industrial businesses. We are also not targeting the financial services sector because there is a lot of regulation in the sector. Then there is the fintech industry, which is nascent and outside of our mandate.

M&A Africa: The fund is looking for investments and opportunities. Are there quality opportunities available in the market?

Shafiek: There are a lot of opportunities available, but we are remaining disciplined. We have to stick to our knitting. With the uncertainty in the listed space or general economy, we find ourselves getting opportunities to acquire assets outside of listed companies. It is not because they are distressed assets but because there are changes in views of what is core or no longer core, or they have to generate enough cash to settle the debt. With an uncertain market, we think that creates a lot of opportunities for capital.

There are established companies in South Africa that are looking for capital to grow. And private equity is the right tool because we are a lot more patient. We are now seeing an increase in sector codes for BEE and companies that were waiting to see what will happen with BEE and need an equity partner to enhance their BEE profile. Whenever we invest, we want to have two board seats on the investee company. We want to deploy women and black people on boards.

M&A Africa: The private equity market is known for loading debt in investee companies. What is your philosophy on debt?

Shafiek: We are unlikely in the next three to five years to have any debt either at the fund level or API. The debt must be used to grow a company. Because we are a long-term investor, there is no pressure to use debt or extract profits quickly.

Debt can put the management teams under pressure to service the debt profile. The management teams we are targeting in the mid-market space don’t usually have the experience and by putting management in that space [of loading them with debt], you are taking their eye off the ball in growing a company. There will be leverage but it has to be sensible, constructive and productive. It has to be debt that is part of a broad strategy of a company and not just done to facilitate a shareholding structure.