African Rainbow Capital (ARC) Investments, which enables investors to co-invest with Ubuntu-Botho Investments (UBI) – Sanlam’s broad-based black economic empowerment (BEE) partner – made its debut on the JSE earlier this month. ARC Investments raised R2.2 billion in an oversubscribed placement to institutional investors, after earlier raising R2.1 billion from three anchor investors, including Sanlam Private Wealth. We estimate strong net asset value growth for the investment entity over the medium term.
African Rainbow Capital was created in 2015 with a vision to building a leading black-controlled financial services and investment group. With Dr Johan van Zyl and Johan van der Merwe as co-CEOs, ARC is 100% owned by Ubuntu-Botho Investments, led by respected businessman Patrice Motsepe.
UBI was founded in 2003 as Sanlam’s BEE partner in a deal that turned out to be one of the most successful BEE partnerships in South African history in terms of value created for the beneficiaries. Today, UBI owns 13.5% of Sanlam, valued at around R20 billion.
Borrowing against its Sanlam shares as collateral, ARC has built up a portfolio in excess of R6 billion over a relatively short time frame. ARC’s access to capital, black empowerment credentials, and the business acumen and networks of its management team have made it a sought-after partner for growing businesses in need of empowerment.
Stronger than expected growth in the investable pipeline for ARC moved the company to launch a listed investment vehicle, ARC Investments. The listing of this entity earlier this month allows investors to co-invest with UBI in a permanently broad-based black-controlled investment entity with a diversified, indirectly held underlying portfolio of listed and unlisted investments.
The listing price of R8.50 per share was the directors’ intrinsic net asset value for the underlying assets. Although the market is likely to trade ARC Investments shares below net asset value as a result of factoring into account the management fee structure (1.75% per annum management fee plus 16% performance participation), we estimate that the directors’ valuation understates the fair value of the assets.
We believe the opportunity to deploy the large cash balance into attractive new investments at below fair market values (due to the empowerment credentials of ARC Investments) and management’s assessed ability to extract synergies should result in strong net asset value growth over the medium term.
