The share price of Ethos Capital, a public vehicle for private equity, has steadily since listing in August 2016, infected perhaps by the Brait taint. Out with results on Thursday, Ethos’s net asset value has edged up 7% since going public, perhaps as only 18% of its fund was invested. Since year-end it has struck new deals, however, taking invested capital to 40%.
Business Day asked CEO Peter Hayward-Butt why they have not found favour with the market.
Obviously, the Brait factor hasn’t helped — when we first went to the market, Brait was trading at a 20%-30% premium to NAV [net asset value] and it’s now at a 30% discount…. I think the biggest issue really is private equity by its nature is a long-term game. When we listed we said to those investors coming in, ‘you need to have both the commitment and the patience to see it pan out’. Over time what you want is that the return on your portfolio exceeds the cost of equity, in which case you should trade at a premium — but we need to get assets in the ground first before we can show that sort of performance.
You had invested 18% of your NAV in the year, that’s since moved up. But is that a slower start than people may have expected?
Even when you find a deal you want to do, [they] take time to close out — it probably takes a six-month process to put deals on the books. So having done 40% in the first year is slightly ahead of what we portrayed to investors — that it was going to take about two-and-a-half years to invest the capital. Conditions are difficult but the portfolio still grew ebitda [earnings before interest, tax, depreciation and amortisation] at 10%. That’s a pretty good result.
The net return on the unlisted portfolio equates to an internal rate of return [IRR] of 12%. Is that enough?
We targeted 20% IRR but you must remember when you initially put an asset on the books, particularly in the first year, your chance of getting 20%-30% is relatively low. You spend a lot of money capitalising the businesses, investing behind them, probably putting new management teams in place…. So, no, it doesn’t meet the target, but for deals in their first year we’re happy to see them growing….
The two companies you invested in post year end were Primedia and Kevro. What’s the appeal?
[Primedia] is nearly a billion-rand business, it’s very cash generative, there’s a really good moat around [it] … We think Roger Jardine and his team are a good team to back. Brait needed to sell its stake and we’ve got a very good relationship with the Brait guys. We managed to get a deal done that probably not many others could deliver. We think we got it at the right price. And we’ve got a good relationship with the existing shareholders there: RMB, MIC and Old Mutual.
But is that moat as big as you’d like to think?
Advertising spend is very GDP-related so there’s a high correlation, but we believe we’re calling the bottom of the cycle and hopefully we start to see some GDP growth, which I think will reflect in companies’ confidence. And if confidence is up, advertising spend should follow. We’ve done detailed analysis [on] the impact digitisation has had on the media space: we think it’s had less impact on radio than anywhere else, although it’s not to say those issues aren’t prevalent.
And Kevro?
It’s a business we know very well: it’s the first asset Fund VI invested in. If you ask me what’s our biggest risk, it’s when you buy an asset and you lift the bonnet and say: what have I actually bought? [With Kevro] we know what we’re getting and we’ve got good partners – we’re in a consortium with RMB Ventures and Corvest. It was [also] an opportunity for the Ethos mid-market fund, which could bring some BEE [black economic empowerment] credentials to the business as well.
On that angle, are you being scooped by African Rainbow Capital, which has very strong BEE credentials?
Look, I think they’ll be a great competitor; we hold them in very high regard…. It’s good to have competitors in the market — when you own assets you also need to be able to sell them to somebody, so the more competitors you have the better. On a one-on-one comparison, I would be honestly saying I don’t think we’ve found an asset where we wanted to do a deal and they usurped us — but that’s not to say it can’t happen. But if I look at their portfolio, it’s certainly different to the type of transactions we’ve invested in, where they are smaller minority BEE stakes.
You’ve made some initial commitments to three new funds, including healthcare — what’s that all about?
We partnered with Michael Flemming [former Life Healthcare CEO] and Jonathan Lowick [head of business development at Life]. We know them from my time at RMB, but probably more pertinently they’ve been through the full cycle: they were part of the business before it went into private equity hands, they went through private equity, they then listed and continued to grow it, and that’s very similar to the strategy we’re looking to implement in the fund.
To set up a new vehicle which will access the second-tier hospital groups in the country, help them bring some operational expertise and capital to help grow and consolidate and help them become real competitors to the tier-one players. But also to do not just hospital deals, there’s a lot of ancillary type businesses that we’ve looked at which we think would work well on a healthcare platform. It’s still early days, we’re seeing if there’s interest to back a fund.
