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Intrinsic net asset value per share has shown decent growth

African Rainbow Capital Investments (commonly referred to as ARC) has been a disappointment for investors, with a history of large management fees at the expense of shareholders. A recent change to the management fee structure has started to address that issue, although there’s no way to claw back the original payments. The management fee for the year ended June 2023 was R98 million vs. R225 million in the prior year.

I still don’t think a 10% performance hurdle is appropriate though. These days, you can get that by just locking the money up in a fixed deposit for a few years! Performance fees are still too high.

A positive step is that the portfolio is more focused than before, with three major disposals and a particular focus on reducing exposure to listed shares. The best way to start closing a discount to intrinsic net asset value (INAV) per share is to own assets that investors can’t get elsewhere. If the assets are simply shares in other listed companies, then what is the point of the intermediary group even existing in the first place?

The top 13 investments now comprise 88% of the portfolio and the unlisted portion of the portfolio is 89%. The largest asset is Rain, contributing 27.6% of the fund’s value. The valuation increased in response to improved EBITDA and the acquisition of spectrum. TymeBank is 12.3% of the fund’s value has now has 7.4 million customers. Tyme Global is reported separately and is 4.8% of fund value.

There have been some substantial investments in portfolio companies, with debt in the ARC Fund increasing by 51% as a result. R664 million was invested in TymeBank and Tyme Global to fund the acquisition of Retail Capital and R883 million was advanced to Kropz Plc (which contributes 11.7% of fund value).

After a performance hurdle was met in the previous year and more shares were issued, NAV per share on an IFRS basis only increased by 13.5% despite the effective share of invested assets increasing by 19.8%.

The INAV per share is R11.41 and the share price is R6.00. That’s a discount of 47.4%.

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