Inside African Phoenix’s R1.2bn Private Equity Gamble

African Phoenix Investments, the company that surfaced when African Bank Investment Limited came out of business save, has set R1 aside.2bn for a new private equity fund to purchase eight to 10 deals over the next three years. This investment shall be unleashed in tranches around R500m. The private collateral fund has at least two offers under due diligence already. Private equity has sometimes conjured up feelings of trepidation in investment circles due to its bad reputation. Historically, private collateral models were led by corporate and business raiders who obtained businesses, restructured them by introducing high levels of debt and reduced costs by cutting jobs dramatically.

While investee businesses were saddled with crippling debt, private equity traders were pocketing controversial profits and talking to fees. South Africa has its own disastrous, private equity models. Edcon, South Africa’s largest clothing dealer, labored under a crippling R25-billion debts insert, embarked on mass retrenchments, and battled to pay its suppliers since private equity firm Bain Capital bought it in 2007 for R25-billion. Edcon is the battling owner of Edgars, Jet, and CNA that has lost market share to its retail peers and lately received a far more than R2-billion bailout from investors. After pumping personal debt into Edcon to mount the countless failed turnaround initiatives, Bain sold the merchant in 2016, leaving it in financial problems.

But Bain was able to suck out about R664-million in “consulting fees” over its eight-year Edcon investment. There’s a wide acceptance that the high leverage, short-term investment, and profit-making private equity model are unsustainable. Investors are falling back again to private equity models that create sustainable value by partnering with the management of investee businesses for the long-term and supporting their development strategy. Debt will still be used, but not at gargantuan levels.

This is the investment beliefs that is embraced by a private equity fund founded by African Phoenix Investments (API). API is the business that emerged when African Bank Investment Limited came out of business save after its underlying banking business, African Bank was placed under curatorship by the SA Reserve Bank in 2014 due to soured loans.

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“We are not trying to produce a return in three or five years. API will provide seed capital to the private collateral fund to invest in unlisted businesses in areas including telecommunications, healthcare, and education. API has arranged R1 apart.2-billion for the private equity fund to purchase eight to 10 deals over another three years in tranches of about R500-million. Nhlumayo said the private equity finance has at least two offers under homework. Before getting into any investment technique for the private collateral finance, API was distracted with a legacy issue regarding African Bank Investment Limited (Abil) shareholders.

To shift its strategy to an investment keeping firm, API needed to repurchase and cancel all the 13.5 million preference shares released by Abil in the 10 or so years before its collapse. These stocks are common in the banking environment; they get set dividends and usually don’t have voting privileges. API valued the preference shares at R37.50, a value which it said was in line with what the preference shares have been trading at – or in other words, the market price.