Since listing on the JSE on 7 September 2017, few companies have captured the imagination of the South African investment public like African Rainbow Capital Investments (ARC Investments). The announcement that the business will de-list shortly is a poor indictment of the state of the JSE’s equity market.
Founded by billionaire Patrice Motsepe, backed by financial services giant Sanlam and giving investors access to high-growth investments such as Tyme Bank and telecoms group Rain, the group has achieved a market capitalisation of R14bn.
A recent comment from co-founder Johan Van Zyl in an interview with Giulietta Talevi from Currency News is telling:
“The JSE is not what it used to be – you can’t easily get capital,” says Van Zyl, who recalls that when he started as Sanlam CEO in 2003, the insurer, which then had a market cap of R10bn, had 18 analysts covering it. “Now we have a single analyst covering ARCI [which is worth R20bn] and they maybe look at Tyme and rain and nothing else. And then some [of our businesses] are start-ups, so it takes a while to break even and with a lack of news you can’t drive a market; it simply doesn’t work.
Good enough for a South American giant but not for the South African bourse
The comment about the lack of news is telling as the strongest asset in the group – Tyme Bank – has dominated headlines in South Africa and even attracted investment interest from a global heavyweight.
Tyme Group (TymeBank) reached unicorn status with a US $.1.5 billion (approximately R26.7 billion) valuation after securing US$250 million in its latest capital raise. This included welcoming Nubank – one of the world’s largest digital financial services platforms – as a strategic investor.
David Vélez, Founder and CEO of Nubank, told investors in shareholder communication: “Since the beginning of Nubank, we have believed that the future of financial services globally is of digitally native companies. We have met dozens of teams across different geographies, and we think that Tyme Group is extremely well-positioned to be a digital bank leader in Africa and Southeast Asia. We are excited to work with Tyme to share many of our learnings of scaling this model to hundreds of millions of customers.”
A single equity analyst for a multi-billion Rand holding company?
The comment from Johan Van Zyl around the lack of equity analyst coverage is critical and highlights why JSE listed businesses in South Africa need to invest in research capacity.
In my recent column for the Daily Maverick, I touched on this issue where I made the point that just 23 of the 270-odd listed businesses on the JSE are formally covered by rated analysts.
Here we have a business which attracts the investment attention of Nubank – one of the world’s leading financial services groups – and there is a single analyst covering the stock.
Failure to sell the story? Yes and no.
While much has been made about the contentious management fees charged by the ARC management, the core issue surrounding ARC is around its lack of liquidity.
According to data from Moneyweb, the company had daily average trade of around 208 000 – approximately R1.9m per day.
This was a key issue highlighted by Van Zyl in the Currency News interview where he pointed out that management were caught between a rock and a hard place. Shareholders were challenging the company to narrow the gap between the share price and the reported Net Asset Value (NAV). Management initiated a buy-back, but the end result of this was that smaller investors opted to offload their shares back to the company, causing the free float on the JSE to drop to just 10.
The below provides a snapshot of the shareholder spread as at the end of June 2024.
The ability to attract 73 000 individual investors is actually a very good achievement – this means 73 000 retail investors have bought into the story.
For context, we could compare this to the likes of Famous Brands (6 055 individual investors), Momentum Metropolitan (24 927) and Purple Group – the business behind EasyEquities – which has 92 487 individual investors.
In short, African Rainbow Capital did capture the attention of retail investors… where it struggled was to sell its story to the next level of investors.
An investment in equity research is key to revitalise the JSE
African Rainbow Capital not only has assets which are attractive to global investors but also represented an aspirational investment vehicle for those looking to back a business which was developed by a leading black investor.
If the JSE is serious about attracting investor interest, it is critical that the bourse invests equity research capacity in its ecosystem.
Enterprise and Supplier Development (ESD) funding is a natural tool for developing research capacity, but listed businesses also need to continue to identify mechanisms for engaging shareholders and better selling their stories to potential investors.