Investments
All investments are made with the ARC Fund, which has 100% of all Diversified (non-financial) Investments and 49.9% of all Financial Services Investments. The balance of 50.1% of Financial Services Investments is held in ARC Financial Services, a 100% subsidiary of ARC.
As at 30 June 2020, the ARC Fund had an Intrinsic Portfolio Value of R11 139 million (2019: R9 359 million) of which R 7 728 million (69.4% of the portfolio) is attributable to the Diversified Investments portfolio and R3 411 million (30.6% of the portfolio) is attributable to the Financial Services portfolio.
The ARC Fund’s strategy for the Financial Services portfolio is to be an investor in leading providers of products and services in the South African financial services sector and thereby having exposure to a holistic financial services offering to clients. The objective is to follow a focused financial services’ sector strategy that seeks to develop revenue synergies between investments in distribution businesses and investments in related financial services product providers.
Pursuant to this strategy, the ARC Fund, through ARC Financial Services, aims to establish a significant presence in the following underlying financial services product provider sectors: banking, asset management & insurance (life insurance, short term insurance, health), and specialist financial services businesses.
Our financial services strategy is premised on securing a significant position in the distribution of financial services products and accelerating the growth of financial services product providers within its portfolio. ARC Financial Services may invest in start-up businesses whose revenue growth can be expected to be significantly enhanced by access to the underlying distribution businesses.
All of ARC Fund’s interests in the financial services sector will be acquired through ARC Financial Services.
Our investments in businesses spanning asset management and insurance represent a key part of our Financial Services strategy. Most of the businesses are positioned to draw flows from institutional clients, with their competitiveness being enhanced by solid empowerment credentials as well as cost-effective solutions across pension funds as well as life, short-term and health insurance businesses.
Our significant investment in banking, which was made more recently relative to our other investments, completes our Financial Services strategy. Our banking investments span to key assets: TymeBank in South Africa and Tyme Global, which is domiciled in Hong Kong and houses the advanced technology which TymeBank uses. We believe by leverage technology we can make banking simple and affordable, by implementing a unique low-cost banking fee model and customer experience value propositions. In the context of investee companies also offering cost-effective product solutions to customers, our investment in banking will allow for synergistic opportunities and thus continue to unlock value for shareholders.
Our Specialist Financial Services businesses are unique and/or niche players with specialist knowledge that have the ability to offer its services and products to a much broader client base by leveraging its relationship with relevant investee companies in the portfolio.
Capital Legacy is a major player in will drafting and estate administration. Operating since 2012, the company has identified improved, efficient and cost-effective solutions to will drafting, estate planning and execution.
While investments in Financial Services businesses are guided by our core experience and successful track record in managing financial services businesses, our approach with Diversified Investments is to partner with leading industry or sector specialists in sectors we believe will be key in the economy in years to come.
Investments in these sectors are made where demonstrable growth potential exist that would further the objective of delivering returns above the internal return target of 16%. We see these investments as a combination of growth assets as well as business that are about to reach a steady-state but still generate sustainable cash flows.
The strong and ongoing demand for data to facilitate communication is a key reason for identifying the telecommunications sector as an investment focus. Furthermore, our investments in this sector has been made possible due to our long-standing relationships we have with the owners of the businesses as well as the prized assets in these businesses. We believe these investment opportunities would not be readily available to a broad grouping of investors.
As requirements for empowerment across many sectors in the South African economy continue, we are likely to see established businesses outsourcing the management of some of its operations to a 3rd party with the requisite expertise and experience in knowledge-based and technology enhanced services. Being positioned as an empowered 3rd party will strengthen the likelihood of securing the institutional business.
Our investment in this sector is motivated by the continued demand for infrastructure development in South Africa and we believe the companies which we have invested in will be key providers of materials to infrastructure developers.
Real estate is a key strategic pillar of our investment portfolio. The objective is to establish a diversified real estate holding spanning across the spectrum to include retail, residential, commercial, listed, unlisted, real estate investment trusts, local and foreign property exposure.
Recent amendments to the B-BBEE Codes, whereby companies that dispose of a property asset have the ability to qualify for B-BBEE ownership points, provide a potential catalyst with regard to transformation in the property sector.
In conjunction with Signature Investment Holdings, which will be a joint venture partner of the ARC Fund, ARC Investments, through the ARC Fund, views itself as a credible B-BBEE participant with both the appropriate expertise and balance sheet to originate, structure and deliver on transactions in the sector.
Agriculture and food production are identified as a strategic sector for investment. Internationally, food security is and will remain of great interest and South Africa (and Africa) is seen as a major potential contributor to food security.
Our interest in agriculture is focused on the secondary markets where processing, marketing and distribution takes place, and not the primary sectors where production takes place and which is known for significant input price as well as product price volatility.
