EPE CAPITAL PARTNERS LTD (“ETHOS CAPITAL” OR “THE COMPANY”)
INCORPORATED IN THE REPUBLIC OF MAURITIUS
REGISTRATION NUMBER: C138883 C1/GBL
ISIN: MU0522S00005
SHARE CODE: EPE
EPE Capital Partners Ltd (“Ethos Capital” or “the Company”) is an investment holding company, registered and incorporated in Mauritius and listed on the JSE Limited (“JSE”). It invests directly into Funds or Direct Investments, managed by Ethos Private Equity (Pty) Limited (“Ethos”), which give the Company indirect exposure to a diversified portfolio of unlisted private equity-type investments (“Portfolio Companies”). By nature, private equity is a long-term investment, requiring long-term thinking and a patient strategy.
Ethos Capital’s investment objective is to be achieved through the following strategies:
1 | Primary Investments
Commitments to various Ethos Funds during their respective fundraising processes.
2 | Secondary Investments
Acquisitions of existing Limited Partner interests in established Ethos Funds.
3 | Direct Investments
Direct acquisitions of interests in underlying Portfolio Companies alongside Ethos Funds to the extent that the Ethos Funds require co-investors.
4 | Temporary Investments
Temporary Investments in a portfolio of low-risk, liquid debt instruments (including, inter alia, South African government bonds, NCDs and other similar, low-risk, liquid instruments) for cash management purposes, as appropriate.
The investment advisor, Ethos, was founded in 1984, and has an established track record of investing in private equity transactions in South Africa and other sub-Saharan African countries. Ethos targets control buyouts and selected expansion capital investments in companies with strong growth potential.
Ethos employs over 65 members of staff, including 18 partners, which makes it the largest private equity firm in sub-Saharan Africa. An institutionalised approach to investing, world-class governance, extensive origination networks and an experienced investment team provide Ethos with a competitive advantage in the sub-Saharan Africa private equity market.
It manages over R11 billion on behalf of public and corporate retirement funds, sovereign wealth funds, fund-of-funds, development financial institutions and, most recently, Ethos Capital. Investors are based in South Africa, Europe, North and South America and the Middle East and Asia.
Ethos has an unparalleled 33-year record of successful, sustainable investing across economic and political cycles. To date, it has invested in 106 transactions, delivering 96 realised investments at a 36.3% gross Internal Rate of Return (“IRR”) and a 2.7x multiple of cost.
This interim report may contain statements regarding the future expected financial condition and results of the Company, which involve risk and uncertainty. These forward-looking statements have not been reviewed or reported on by the Company’s auditor.
The 2017 year was economically and politically challenging for South Africa. GDP growth remained subdued, consumer confidence was soft, and policy and political uncertainty severely impacted companies’ strategic deployment of capital and investor confidence.
South Africa’s longer-term outlook has, however, improved significantly of late. Political changes – both within the ANC and also at national government with Mr Cyril Ramaphosa taking over as South Africa’s new president in February 2018 – are likely to result in a significant uplift in both consumer and business confidence. The subsequent changes to key government ministerial leadership will hopefully drive the implementation of clear policies in crucial sectors of the economy. Enhanced governance at key state-owned enterprises will also provide for growth in many dependent sectors across the economy. While it will take time for revised government mandates and structural changes to take full effect, we are confident that South Africa’s long-term growth prospects are greatly improved.
Private equity is a long-term investment strategy which requires patient capital and an activist mindset to outperform. Given the difficult economic conditions, growth in the private sector has been constrained, and many of Ethos’s Portfolio Companies have not been immune to the downturn. The underlying attributable EBITDA growth across the various Funds’ portfolios over the past 12 months has been relatively modest. Importantly, the Ethos Fund teams, together with the in-house Value Add capability, have spent significant time and effort to ensure that each Portfolio Company is optimally positioned, both strategically and operationally, to benefit from the turnaround in the economic cycle. With economic prospects likely to improve in the medium term, we believe that the value-accretive strategies implemented at Portfolio Companies should start delivering accelerated growth.
The Board’s medium-term objective remains to fully invest Ethos Capital’s NAV, while managing liquidity and commitment strategies in a disciplined way. In support thereof, Ethos is continuing to review opportunities to develop and grow its product offerings, with the launch of Ethos Healthcare Investments being the most recent initiative. The strategies that Ethos Capital is invested in are detailed alongside:
Ethos Mid Market Fund I
The Ethos Mid Market Fund I (“EMMF I”) had its first close in November 2016, and is expected to have its final close by the end of May 2018, with commitments of over R2 billion.
To date, the Fund has invested in six Portfolio Companies, representing 44% of the total commitments to the Fund. The Fund has a strong pipeline of potential investments in the mid-market space and its broadbased black economic empowerment (“B-BBEE”) credentials are providing a competitive advantage in sourcing such opportunities.
Ethos Fund VI
Ethos Capital completed a secondary transaction of a stake in Ethos Fund VI (“EF VI”) in November 2016. The stake is relatively small (a US$10 million commitment) at 3% of the NAV, but currently provides exposure to nine Portfolio Companies.
Since June 2017, the Fund has successfully exited one investment at a Fund return of 2.7x cost invested. A further two exits are expected to be completed in Q2 2018.
Ethos Fund VII
Fund raising for Ethos Fund VII (“EF VII”) was launched in August 2017, with a target size of R8 billion to R10 billion. Ethos Capital has made a first close commitment to this Fund of R1.25 billion with an intended final commitment of up to R2.3 billion; this will provide investors with exposure to large buyout Portfolio Companies based in South Africa and other select sub-Saharan countries. The first close for this Fund is likely to occur in Q2 2018.
Ethos Mezzanine Partners Fund 3
Ethos Mezzanine Partners Fund 3 (“EMP 3”) is likely to have its first close in March/April 2018, with strong demand from international investors, especially development finance institutions.
The pipeline of opportunities for this Fund is strong, with particular application of the mezzanine product to growth opportunities in sub-Saharan Africa. The Fund has signed two term sheets for transactions which are likely to close in Q2 2018. Aligned with this strategy, Ethos recently opened a satellite office in Nairobi, Kenya, and believes this footprint will further enhance deal origination and investment management into the future. The Fund operates in a relatively uncontested niche, which has resulted in strong demand both from potential investors and also companies looking to access growth capital.
Ethos Capital has made a first close commitment of R250 million to this Fund with an intended final commitment of R320 million.
Ethos Healthcare Investments
Ethos Healthcare Investments (“EHI”) is a platform that has been established to invest in hospitals and other healthcare-related industries in South Africa and in other sub-Saharan African countries. The two key principals in this Fund are Michael Flemming and Jonathan Lowick, who were instrumental in establishing, operating and growing Life Healthcare, one of South Africa’s largest hospital groups. The pipeline of opportunities remains strong, and the first investment has been signed and is subject to regulatory approval. Ethos Capital has made a commitment of R250 million to EHI.
Direct Investments
During the period, a Direct Investment of R100 million was made in Kevro Holdings (Pty) Ltd (“Kevro”), alongside EMMF I. In addition, a further Direct Investment of R171 million was made in Primedia Holdings (Pty) Ltd (“Primedia”), alongside EF VI. The Company continues to assess a number of interesting additional co-investment opportunities alongside the various Ethos Funds.
The pipeline of opportunities across all of the Funds remains very strong. While there is improvement in the macroeconomic environment, it is important that the Funds continue to invest selectively in assets that have a robust and defensible business case.
Across the various Funds, Ethos is in exclusive discussions on seven investments. Two have been signed and are subject only to regulatory approval. A further two investments are well progressed and have signed term sheets. While there can be no guarantee that all of these transactions will close, Ethos remains confident that it will be able to close on the majority of these investments.
The amount of capital required by Ethos Capital into these transactions, should the Funds be successful in closing all of them, would be approximately R400 million.
During the six months ended 31 December 2017, the NAV increased to R1.9 billion, equivalent to R10.76 per share.
At 31 December 2017, Ethos Capital’s unlisted invested capital (including guarantees) was 39% of the NAV, with the balance largely invested in Temporary Investments.
An analysis of the movements in the NAV and NAVPS is detailed below:
| NAV R’000 |
NAVPS Cents |
|
| At 30 June 2017 | 1 867 079 | 10.37 |
| Net return on Temporary Investments | 52 427 | 0.29 |
| Return on investment portfolio | 28 511 | 0.16 |
| Share buybacks | (17 344) | 0.03 |
| Expenses and tax | (10 457) | (0.06) |
| Fees paid to Ethos | (6 207) | (0.03) |
| At 31 December 2017 | 1 914 009 | 10.76 |
The net return on Temporary Investments during the period was R52.4 million, representing a net annualised return of 7.6%. The net return on the unlisted investment portfolio was R28.5 million, implying a cumulative IRR of the investment portfolio of 12.2%.
Operating expenses and tax for the Company totalled R10.5 million, constituting 0.5% of NAV, of which R4.2 million relates to transaction-related fees in respect of completed and aborted transactions.
The fees payable to Ethos include advisory fees on Primary and Direct Investments, charged at 1.5% per year on the average invested capital over the period, and management fees on Temporary Investments, charged at 0.25% per year less any fees payable to Ashburton Fund Managers Proprietary Limited (“Ashburton”) for managing the portfolio of Temporary Investments. Further details on expenses are provided in note 9 of the Notes to the Interim Financial Statements.
Ethos Capital’s share price as at 31 December 2017 was R8.70, which represented a 19.1% discount to the NAVPS at 31 December 2017.
As noted previously, the Ethos Capital Board is committed to a policy of enhancing long-term shareholder value. The Company has continued to repurchase shares to enhance shareholder value and the shares acquired by the Company are held in treasury. During the six months to 31 December 2017, the Company repurchased an additional 2 034 038 shares representing 1.1% of the unencumbered issued A Ordinary Share capital.
Since the period-end, the Company has continued to repurchase shares and the Board will continue to monitor the Company’s share price performance and the discount to NAV.
Ethos Capital’s Investment Strategy is to make investment commitments into Funds managed by Ethos, through a combination of Primary, Direct and Secondary Investments, or making commitments to Direct Investments. As at 31 December 2017, Ethos Capital had liquid resources of R1.2 billion to meet any outstanding commitments. In addition, the Company has agreed a four-year revolving credit facility with Rand Merchant Bank (“RMB”) that, once activated, will provide access to c. R0.6 billion of additional resources for the Company.
As at 31 December 2017, the Company’s closed and approved – subject to legal Fund closings – commitments to Ethos Funds were as follows:
| Type | Vintage | Original R’000 |
Undrawn R’000 |
|
| Closed | ||||
| EMMF I | Primary | 2016 | 900 000 | 532 085 |
| Primedia | Direct | 2017 | 171 105 | 8 199 |
| EF VI | Secondary | 2011 | 123 050 | 17 670 |
| EMMF ID* | Direct | 2017 | 100 000 | – |
| 1 294 155 | 557 954 | |||
| Approved | ||||
| EF VII | 1 250 000 | 1 250 000 | ||
| EMP 3 | 320 000 | 320 000 | ||
| EHI | 250 000 | 250 000 | ||
| 3 114 155 | 2 377 954 |
* Investment in Kevro via the Ethos Mid Market Fund I Direct Partnership (“EMMF ID”).
At 31 December 2017, the investment portfolio and invested capital consisted of the following:
| Cost R’000 |
Valuation R’000 |
% of NAV | |
| Investments | |||
| EMMF I | 362 265 | 403 957 | 21.1 |
| Primedia | 160 275 | 160 275 | 8.4 |
| EMMF ID* | 100 000 | 100 000 | 5.2 |
| EF VI | 65 402 | 65 458 | 3.4 |
| Total investments | 687 942 | 729 690 | 38.1 |
| Unfunded guarantees | |||
| EF VI** | – | 20 064 | 1.1 |
| Total invested capital | 688 088 | 749 754 | 39.2 |
* Investment in Kevro via the Ethos Mid Market Fund I Direct Partnership (“EMMF ID”).
** Guarantees provided by the Fund to raise financing that was used to invest in Portfolio Companies.
During the period, the investments in two Portfolio Companies (Kevro and Primedia) were completed as well as the EMMF I investment into MTN Zakhele Futhi (the BEE shareholder of the MTN Group). This increased Ethos Capital’s underlying exposure to 11 Portfolio Companies across a number of sectors which provide a diversified portfolio exposure.
Post-December, EMMF I completed the acquisition of Echotel Proprietary Limited (“Echo”), of which Ethos Capital’s contribution was R34.0 million. Echo is a South African corporate Internet Service Provider and primarily services domestic high-end SME and enterprise clients.
The above increased Ethos Capital’s invested capital to 41% of NAV and its underlying exposure to 12 Portfolio Companies.
During October 2017, Ethos Capital received R11.9 million as its share of the sale of Kevro by EF VI which generated a Fund return of 2.7x cost invested. A further two exits are expected to be completed in Q2 2018.
The Ethos Funds – making up Ethos Capital’s investment portfolio – invest in a diversified pool of unquoted investments (Portfolio Companies) and provide the Company with indirect exposure to the Funds’ underlying investments. At 31 December 2017, the investments (excluding guarantees) constituting 38.1% of total NAV, consisted of the following 11 companies and other surplus cash and current assets at the Fund level:
| Name | Fund | Business description | Year* | % of NAV |
| Kevro | EMMF I/ EMMF ID | Corporate clothing and promotional | 2017 | 11.3 |
| Primedia | EF VI/Direct | Media | 2017 | 8.9 |
| Autozone | EF VI/EMMF I | Retailer and wholesaler of automotive parts | 2014 | 5.5 |
| MTN Zakhele Futhi | EMMF I | Telecommunications | 2017 | 3.7 |
| Twinsaver | EF VI/EMMF I | Industrials (FMCG) | 2015 | 3.5 |
| Eazi Access | EF VI/EMMF I | Industrial support services | 2016 | 3.2 |
| Eaton Towers | EF VI | Shared telecoms towers | 2015 | 0.6 |
| Waco International | EF VI | Industrial support services | 2012 | 0.6 |
| The Beverage Company | EF VI | Carbonated drinks | 2017 | 0.3 |
| RTT | EF VI | Logistics | 2014 | 0.2 |
| Neopak | EF VI | Paper and packaging | 2015 | 0.2 |
| Other | EF VI/EMMF I | Cash and current assets | 0.1 | |
| 38.1 |
* Initial acquisition date by Ethos Fund
Ethos Capital’s investment portfolio at 31 December 2017 provides exposure to 11 Portfolio Companies that, in aggregate (excluding the results of the MTN Group), have sales of over R24 billion and EBITDA of more than R4 billion. The companies span a number of sectors providing diversified portfolio exposure.
The economic environment in South Africa and sub- Saharan Africa has remained subdued in the past 12 months, with some prevalent macroeconomic headwinds. However, the Portfolio Companies’ performance held up relatively well and the Funds benefited from sectoral diversity in the portfolio and some of the initiatives undertaken to optimise operations. The growth in the aggregate sales of the Portfolio Companies (excluding the results of the MTN Group) over the last 12 months (“LTM”) to 31 December 2017 was 6.1% while the portfolio grew its LTM aggregate EBITDA by 4.6%.
The NAV of each Fund is derived from the valuations of the underlying Portfolio Companies, which are prepared in accordance with International Private Equity and Venture Capital Guidelines (“IPEV Guidelines”). Valuations are performed quarterly, audited semi-annually and approved by each Fund’s Advisory Board. The IPEV Guidelines set out best practice where private equity investments are reported on at fair value
As at 31 December 2017, the Ethos Capital portfolio of investments was valued at an average EV/EBITDA multiple of 6.9x. The IPEV Guidelines require the Manager to ascribe a series of adjustments to the Portfolio Company valuation multiples to reflect their unlisted nature and company-specific factors. As at 31 December 2017, the average EV/EBITDA multiple represents an average discount of 41% compared to the equivalent multiple of the Portfolio Companies’ peer groups.
The value-weighted average Net Debt/EBITDA of the portfolio was 2.0x.
AT 31 DECEMBER 2017
| Unaudited | ||||
| Notes | 31 Dec 2017 R’000 |
31 Dec 2016 R’000 |
30 June 2017 R’000 |
|
| ASSETS | ||||
| Non-current assets | ||||
| Unlisted investments at fair value | 4 | 729 690 | 340 175 | 307 939 |
| Total non-current assets | 729 690 | 340 175 | 307 939 | |
| Current assets | ||||
| Other assets and receivables | 21 621 | 24 156 | 26 758 | |
| Money market investments at fair value | 5 | 1 141 236 | 1 421 383 | 1 529 281 |
| Cash and cash equivalents | 25 782 | 10 756 | 10 044 | |
| Total current assets | 1 188 639 | 1 456 295 | 1 566 083 | |
| TOTAL ASSETS | 1 918 329 | 1 796 470 | 1 874 022 | |
| EQUITY AND LIABILITIES | ||||
| Capital and reserves | ||||
| Issued capital | 6 | 1 747 668 | 1 765 359 | 1 765 012 |
| Retained earnings | 166 341 | 28 871 | 102 067 | |
| Total equity | 1 914 009 | 1 794 230 | 1 867 079 | |
| Current liabilities | ||||
| Other liabilities and payables | 3 657 | 889 | 3 775 | |
| Current tax liabilities | 663 | 1 351 | 3 168 | |
| Total current liabilities | 4 320 | 2 240 | 6 943 | |
| TOTAL EQUITY AND LIABILITIES | 1 918 329 | 1 796 470 | 1 874 022 | |
| NET ASSET VALUE | 1 914 009 | 1 794 230 | 1 867 079 | |
| Net asset value per share (Rand) | 11.2 | 10.76 | 9.97 | 10.37 |
| Attributable shares in issue at end of period/year (’000) | 11.1 | 177 926 | 180 000 | 179 960 |
FOR THE SIX MONTHS ENDED 31 DECEMBER 2017
| Unaudited | ||||
| Notes | Six months ended 31 Dec 2017 R’000 |
Six months ended 31 Dec 2016 R’000 |
Year ended 30 Jun 2017 R’000 |
|
| Income | ||||
| Investment income | 7 | 60 121 | 50 627 | 123 901 |
| Net fair value gains/(losses) | 8 | 21 850 | (8 971) | 2 683 |
| Total income | 81 971 | 41 656 | 126 584 | |
| Expenses | ||||
| Management and administration fees | 9.1 | (7 240) | (1 693) | (4 820) |
| Legal and consultancy fees | 9.2 | (4 641) | (5 938) | (8 917) |
| Other operating expenses | 9.3 | (4 361) | (3 803) | (7 612) |
| Total expenses | (16 242) | (11 434) | (21 349) | |
| Profit before tax | 65 729 | 30 222 | 105 235 | |
| Income tax expense | (1 455) | (1 351) | (3 168) | |
| Profit for the period/year | 64 274 | 28 871 | 102 067 | |
| Other comprehensive income for the period/year | – | – | – | |
| TOTAL COMPREHENSIVE INCOME FOR THE PERIOD/ YEAR | 64 274 | 28 871 | 102 067 | |
| Earnings per share | ||||
| Basic and diluted earnings per share (Rand) | 11.1 | 0.36 | 0.16 | 0.57 |
The above relate to continuing operations as no operations were acquired or discontinued during the year.
FOR THE SIX MONTHS ENDED 31 DECEMBER 2017
| Unaudited | ||||
| Six months ended 31 Dec 2017 | ||||
| Notes | Share capital R’000 |
Retained earnings R’000 |
Total equity R’000 |
|
| Balance at 1 July 2017 | 1 765 012 | 102 067 | 1 867 079 | |
| Buy-back of ordinary shares | 6 | (17 344) | – | (17 344) |
| Income for the period | 11.1 | – | 64 274 | 64 274 |
| Balance at 31 December 2017 | 1 747 668 | 166 341 | 1 914 009 | |
| Unaudited | ||||
| Six months ended 31 Dec 2016 | ||||
| Share capital R’000 |
Retained earnings R’000 |
Total equity R’000 |
||
| Issue of ordinary shares | 6 | – | 1 800 075 | 1 800 075 |
| Share issue costs | 6 | (34 716) | – | (34 716) |
| Income for the period | 11.1 | – | 28 871 | 28 871 |
| Balance at 31 December 2016 | 1 765 359 | 28 871 | 1 794 230 | |
| Year ended 30 Jun 2017 | ||||
| Share capital R’000 |
Retained earnings R’000 |
Total equity R’000 |
||
| Issue of ordinary shares | 6 | 1 800 075 | – | 1 800 075 |
| Share issue costs | 6 | (34 716) | – | (34 716) |
| Buy-back of ordinary shares | 6 | – | (347) | (347) |
| Income for the year | 11.1 | – | 102 067 | 102 067 |
| Balance at 30 June 2017 | 1 765 012 | 102 067 | 1 867 079 | |
No comparative financial information as at 1 July 2016 has been presented as no Statement of Changes in Equity was presented in the 30 June 2016 financial statements.
FOR THE SIX MONTHS ENDED 31 DECEMBER 2017
| Unaudited | |||
| Net cash (used in)/generated by operating activities before investment activities | (21 843) | 6 067 | (16 769) |
| Net cash generated by/(used in) investing activities | 55 019 | (1 755 168) | (1 732 697) |
| Cash generated by/(used in) operating and investing activities | 33 176 | (1 749 101) | (1 749 466) |
| Net cash (used in)/generated by financing activities | (17 344) | 1 765 359 | 1 765 012 |
| Net increase in cash and cash equivalents | 15 832 | 16 258 | 15 546 |
| Cash and cash equivalents at the beginning of the period/year | 10 044 | – | – |
| Effects of exchange rate changes on the balance of cash held in foreign currencies | (94) | (5 502) | (5 502) |
| Total cash and cash equivalents at the end of the period/year | 25 782 | 10 756 | 10 044 |
FOR THE SIX MONTHS ENDED 31 DECEMBER 2017
EPE Capital Partners Ltd (“Ethos Capital”, or “the Company”) was registered and incorporated in Mauritius as a private company on 26 May 2016 under the Mauritius Companies Act, Act No. 15 of 2001, and was converted to a public company on 15 July 2016. The Company is licensed as a Category One Global Business Licence company by the Financial Services Commission of Mauritius and is designed to offer shareholders long-term capital appreciation by investing into Funds or Direct Investments that provide the Company exposure to a diversified portfolio of unlisted private equity-type investments.
The following new and revised standards and interpretations are relevant to the Company and have been adopted in these Summarised Interim Financial Statements. Their adoption has not had any significant impact on the amounts reported in these Summarised Interim Financial Statements but may have affected the accounting and disclosure of transactions and arrangements. These standards are effective for companies with financial year-ends beginning on or after the effective date as noted for each standard.
| Standard | Description/name of standard | Effective date |
| IAS 7 | Statement of Cash Flows | 1 January 2017 |
| IFRS 2 | Share-Based Payments | 1 January 2017 |
| IFRS 17 | Insurance Contracts | 1 January 2017 |
| IAS 12 | Income Taxes | 1 January 2017 |
| IFRS 12 | Disclosure of Interest in Other Entities | 1 January 2017 |
The Directors anticipate that these amendments will be applied in the Summarised Interim and Annual Financial Statements for the annual periods beginning on or after the respective dates as indicated above. The Directors have not yet assessed the potential impact of the adoption of these amendments.
| Standard | Description/name of standard | Effective date |
| IFRS 15 | Revenue from Contracts with Customers | 1 January 2018 |
| IFRS 9 | Financial Instruments | 1 January 2018 |
| IFRIC 22 | Foreign Currency Transactions and Advance Consideration | 1 January 2018 |
| IFRS 16 | Leases | 1 January 2018 |
The Directors anticipate that these amendments will be applied in the Summarised Interim and Annual Financial Statements for the annual periods beginning on or after the respective dates as indicated above. The Directors have not yet assessed the potential impact of the adoption of these amendments.
3.1 Basis of preparation
These Summarised Interim Financial Statements have been prepared in accordance with: IFRS as issued by the International Accounting Standards Board; the SAICA Financial Reporting Guides, as issued by the Accounting Practices Committee; the Financial Reporting Pronouncements, as issued by the Financial Reporting Standards Council; as a minimum, the information required by IAS 34; the Listings Requirements of the JSE; and the requirements of the Mauritius Companies Act, Act No. 15 of 2001, in so far as applicable to Category One Global Business Licence companies.
The accounting policies applied in the preparation of these Summarised Interim Financial Statements are, where applicable to the prior financial year, consistent in all material respects with those used in the prior financial year and with IFRS.
FOR THE SIX MONTHS ENDED 31 DECEMBER 2017
3.1 Basis of preparation
The Summarised Interim Financial Statements have been prepared on the historical cost basis except for financial instruments and investments which are measured at fair value.
The Directors believe the Company has adequate resources to settle its obligations as and when they become due, therefore these Summarised Interim Financial Statements have been prepared on the going concern basis.
These Summarised Interim Financial Statements were compiled under the supervision of the Chief Financial Officer, Mr Jean-Pierre van Onselen, CA(SA), and were approved by the Board on 13 March 2018.
3.2 Segmental reporting
Since the Company has only one business segment, and all its investments are managed as one segment investing in private equity-type investments, segmental reporting is not applicable.
The Company obtains exposure to and has indirect interests in a diversified pool of unquoted investments (“Portfolio Companies”) by investing into Fund Limited Partnerships (“Funds”), managed by Ethos Private Equity (Pty) Limited (“Ethos”), that typically have a 10-year life cycle. The Company becomes a Limited Partner of the Fund and the investments are made through commitments into the Funds. Alternatively, the Company can also make direct commitments to invest into Portfolio Companies alongside the Funds.
In November 2016, the Company made a R550 million commitment to the Ethos Mid Market Fund I Partnership (“EMMF I”), which was increased to R900 million in July 2017. The Company also acquired a US$10 million (R123 million) commitment in Ethos Fund VI (Jersey) LP (“EF VI”) in November 2016, through a secondary transaction. During the current period, a commitment of R100 million was made to the Ethos Mid Market Fund I Direct Partnership (“EMMF I Direct”), to facilitate the Company’s first Direct Investment, which was followed by a R171 million commitment to invest directly in Primedia Holdings (Pty) Ltd.
| 31 Dec 2017 R’000 |
31 Dec 2016 R’000 |
30 Jun 2017 R’000 |
|
| Investments held at fair value through profit and loss: | |||
| Unlisted investment in EMMF I | 403 957 | 292 142 | 247 412 |
| Unlisted investment in EF VI | 64 458 | 48 033 | 60 527 |
| Unlisted investment in EMMF I Direct | 100 000 | – | – |
| Unlisted investment in Primedia Holdings (Pty) Ltd | 160 275 | – | – |
| 729 690 | 340 175 | 307 939 | |
| Consisting of: | |||
| Cost | 687 942 | 344 272 | 288 505 |
| Unrealised capital appreciation/(depreciation) at end of period/year | 27 340 | (4 294) | 7 515 |
| Accrued income | 14 408 | 197 | 11 919 |
| 729 690 | 340 175 | 307 939 |
FOR THE SIX MONTHS ENDED 31 DECEMBER 2017
At 31 December 2017, the underlying investments of the above Funds (Portfolio Companies), constituting 38.1% of the Company’s net asset value (“NAV”), consisted of the following 11 unlisted companies and other surplus cash and current assets held at the Fund level:
| Name | Fund/type | Business description/sector | % of NAV 31 Dec 2017 | |
| Kevro | EMMF I/ EMMF ID | Corporate clothing and promotional | 11.3 | |
| Primedia | EF VI/Direct | Media | 8.9 | |
| Autozone | EF VI/EMMF I | Retailer and wholesaler of automotive parts | 5.5 | |
| MTN Zakhele Futhi | EMMF I | Telecommunications | 3.7 | |
| Twinsaver | EF VI/EMMF I | Industrials (FMCG) | 3.5 | |
| Eazi Access | EF VI/EMMF I | Industrial support services | 3.2 | |
| Eaton Towers | EF VI | Shared telecoms towers | 0.6 | |
| Waco International | EF VI | Industrial support services | 0.6 | |
| The Beverage Company | EF VI | Carbonated drinks | 0.3 | |
| RTT | EF VI | Logistics | 0.2 | |
| Neopak | EF VI | Paper and packaging | 0.2 | |
| Other | EF VI/EMMF I | Cash and current assets | 0.1 | |
| 38.1 |
| Cost R’000 |
Capital appreciation/ (depreciation) R’000 |
Accrued income R’000 |
Total R’000 |
|
| Reconciliation of movements: | ||||
| Balance at 1 July 2017 | 288 505 | 7 515 | 11 919 | 307 939 |
| Acquisitions | 408 396 | – | – | 408 396 |
| Realisations | (8 959) | (1 360) | (801) | (11 120) |
| Revaluation increase at end of period | – | 21 185 | 3 290 | 24 475 |
| Balance at 31 December 2017 | 687 942 | 27 340 | 14 408 | 729 690 |
| Balance at 1 July 2016 | – | – | – | – |
| Acquisitions | 349 160 | – | – | 349 160 |
| Realisations | (4 888) | – | – | (4 888) |
| Revaluation (decrease)/increase at end of period | – | (4 294) | 197 | (4 097) |
| Balance at 31 December 2016 | 344 272 | (4 294) | 197 | 340 175 |
| Balance at 1 July 2016 | – | – | – | – |
| Acquisitions | 293 393 | – | – | 293 393 |
| Realisations | (4 888) | – | – | (4 888) |
| Revaluation increase at end of year | – | 7 515 | 11 919 | 19 434 |
| Balance at 30 June 2017 | 288 505 | 7 515 | 11 919 | 307 939 |
FOR THE SIX MONTHS ENDED 31 DECEMBER 2017
| 31 Dec 2017 R’000 |
31 Dec 2016 R’000 |
30 Jun 2017 R’000 |
|
| Investments held at fair value through profit and loss: | |||
| Floating rate notes | 502 001 | 552 433 | 637 091 |
| Negotiable certificates of deposit | 567 475 | 383 368 | 577 473 |
| Treasury bills | 69 241 | 426 858 | 179 185 |
| Cash and call accounts | 2 519 | 58 724 | 135 532 |
| 1 141 236 | 1 421 383 | 1 529 281 | |
| Consisting of: | |||
| Cost | 1 140 684 | 1 420 851 | 1 528 622 |
| Unrealised appreciation at end of period/year | 552 | 532 | 659 |
| 1 141 236 | 1 421 383 | 1 529 281 |
The money market investments, or Temporary Investments, are managed by Ashburton Fund Managers Proprietary Limited (“Ashburton”) under a discretionary investment management agreement dated 28 July 2016. These investments are currently invested in money market instruments that consist of a combination of floating rate notes, negotiable certificates of deposit (“NCD”) and treasury bills.
At 31 December 2017, the following range of interest rates was applicable to the respective categories of money market instruments, from which the accrued income at 31 December 2017 was derived:
| 31 Dec 2017 | ||
| Low % | High % | |
| Floating rate notes | 7.8500 | 8.0750 |
| NCD | 7.1000 | 8.2750 |
| Treasury bills | 7.6538 | 7.6538 |
| 31 Dec 2017 Number | 31 Dec 2016 Number | 30 Jun 2017 Number | |
| Issued: | |||
| A Ordinary Shares issued at R10.00 per share | 180 000 000 | 180 000 000 | 180 000 000 |
| A Ordinary Shares issued at R0.01 per share | 7 500 000 | 7 500 000 | 7 500 000 |
| B Ordinary Shares issued at R0.01 per share | 10 000 | 10 000 | 10 000 |
| Total issued at time of listing | 187 510 000 | 187 510 000 | 187 510 000 |
| A Ordinary Shares purchased | (2 074 140) | – | (40 102) |
| Total issued share capital | 185 435 860 | 187 510 000 | 187 469 898 |
FOR THE SIX MONTHS ENDED 31 DECEMBER 2017
| 31 Dec 2017 R’000 |
31 Dec 2016 R’000 |
30 Jun 2017 R’000 |
|
| Issued: | |||
| A Ordinary Shares issued at R10.00 per share | 1 800 000 | 1 800 000 | 1 800 000 |
| A Ordinary Shares issued at R0.01 per share | 75 | 75 | 75 |
| B Ordinary Shares issued at R0.01 per share | – | – | – |
| Less: Share issue costs | (34 716) | (34 716) | (34 716) |
| Total issued at time of listing | 1 765 359 | 1 765 359 | 1 765 359 |
| A Ordinary Shares purchased | (17 691) | – | (347) |
| Total issued share capital | 1 747 668 | 1 765 359 | 1 765 012 |
During the period, the Company purchased 2 034 038 of its A Ordinary Shares at an average price of R8.53 per share. These shares are currently held in treasury.
| Six months ended 31 Dec 2017 R’000 |
Six months ended 31 Dec 2016 R’000 |
Year ended 30 Jun 2017 R’000 |
|
| Interest from unlisted investments | 6 359 | 50 | 15 854 |
| Dividends from unlisted investments | 101 | 761 | 1 314 |
| Interest from money market investments | 47 988 | 33 656 | 80 251 |
| Interest from bank and call deposits | 382 | 1 330 | 1 486 |
| 54 830 | 35 797 | 98 905 | |
| Amortisation of net discount | 5 291 | 14 830 | 24 996; |
| 5 291 | 14 830 | 24 996 | |
| 60 121 | 50 627 | 123 901 |
| Six months ended 31 Dec 2017 R’000 |
Six months ended 31 Dec 2016 R’000 |
Year ended 30 Jun 2017 R’000 |
|
| Unrealised: | |||
| Net gains/(losses) arising on changes in the fair value of unlisted investments | 19 825 | (4 294) | 7 515 |
| Net (losses)/gains arising on changes in the fair value of money market instruments | (107) | 532 | 659 |
| Net foreign exchange losses on conversion of cash and cash equivalents | (94) | – | (282) |
| 19 624 | (3 762) | 7 892 | |
| Realised: | |||
| Gains on realisation of unlisted investments | 2 226 | – | – |
| Gains on realisation of money market instruments | – | 11 | 11 |
| Net foreign exchange losses on conversion of cash and cash equivalents | – | (5 220) | (5 220) |
| 2 226 | (5 209) | (5 209) | |
| Net fair value gains/(losses) | 21 850 | (8 971) | 2 683 |
FOR THE SIX MONTHS ENDED 31 DECEMBER 2017
Profit before tax has been arrived at after charging:
| Six months ended 31 Dec 2017 R’000 |
Six months ended 31 Dec 2016 R’000 |
Year ended 30 Jun 2017 R’000 |
|
| 9.1 Management and administration fees | |||
| Management fees – Ethos | 2 513 | – | 1 286 |
| Advisory fees – Ethos* | 2 821 | – | – |
| Administration fee – Ethos | 873 | 736 | 1 482 |
| Administration fee – Ashburton | 1 033 | 957 | 2 052 |
| 7 240 | 1 693 | 4 820 | |
| * Payable from 1 July 2017. | |||
| 9.2 Legal and consultancy fees | |||
| Legal and consultancy fees | 73 | 4 409 | 5 154 |
| Fund formation fees | 255 | 1 431 | 1 809 |
| Fund formation fees | 255 | 1 431 | 1 809 |
| Expenses relating to the acquisition of investments | 4 313 | 98 | 1 954 |
| 4 641 | 5 938 | 8 917 | |
| 9.3 Other operating expenses | |||
| Company secretarial, accounting and other administration fees | 758 | 800 | 1 517 |
| Directors’ emoluments | 1 960 | 1 526 | 3 353 |
| Auditors’ remuneration | 419 | 473 | 852 |
| Insurance costs | 321 | 191 | 431 |
| Sponsor and listing-related fees | 377 | 112 | 408 |
| Other expenses | 526 | 701 | 1 051 |
| 4 361 | 3 803 | 7 612 |
| Original | Outstanding | |||
| 31 Dec 2017 R’000 |
31 Dec 2017 R’000 |
31 Dec 2016 R’000 |
30 Jun 2017 R’000 |
|
| Capital commitments: | ||||
| Unlisted investment in EMMF I | 900 000 | 532 085 | 255 442 | 319 205 |
| Unlisted investment in EF VI | 123 050 | 17 670 | 81 815 | 55 874 |
| Unlisted investment in EMMF I Direct | 100 000 | – | – | – |
| Unlisted investment in Primedia Holdings (Pty) Ltd | 171 105 | 8 199 | – | – |
| 1 294 155 | 557 954 | 337 257 | 375 079 | |
| Contingent liabilities: | ||||
| Rand Merchant Bank (“RMB”) | 105 000 | 118 143 | 106 369 | 113 424 |
| 105 000 | 118 143 | 106 369 | 113 424 | |
| Total commitments and contingent liabilities | 1 399 155 | 676 097 | 443 626 | 488 503 |
Refer to note 4 for further details on the capital commitments.
FOR THE SIX MONTHS ENDED 31 DECEMBER 2017
The Company has provided a guarantee against a R105 million five-year non-recourse loan facility (plus any outstanding interest thereon) issued by RMB to Black Hawk Private Equity Proprietary Limited (“Black Hawk”), expiring on 29 July 2021. The proceeds of the facility, signed on 28 July 2016, were used by Black Hawk to subscribe to R105 million of A Ordinary Shares on behalf of the two non-executive Directors, who are members of the Company’s Investment Committee. The above amount represents the current outstanding balance on the facility, including any accrued interest charges to 31 December 2017. Interest currently accrues at a rate that is based on JIBAR plus a 1% margin, and the interest is intended to be rolled-up and settled with the capital amount outstanding upon the maturity of the loan or an earlier repayment event.
As detailed in note 6, the Company issued 187 500 000 A Ordinary Shares, 7 500 000 of which were issued to the EPE Allocation Trust and are currently notionally encumbered. Until these shares are released from their encumbrance (through the notional performance participation), the Company has an irrevocable right and option to acquire the notionally encumbered A Ordinary Shares at a repurchase price of R0.01 per share, being each share’s fair value, and then to apply for the delisting of such shares acquired. The holders of these shares are therefore restricted from selling the shares to any party other than the Company and obtaining or sharing in any economic benefit derived from the shares, until they are released from their encumbrance.
Given the restrictions the encumbered shares place on the holder and the probability of the shares being delisted unless certain contingent conditions are met, they are excluded from the calculations to determine the earnings, headline earnings and net asset value per share (“NAVPS”) respectively. The calculations below therefore reflect the earnings, headline earnings and NAV attributable to the unrestricted A Ordinary shareholders.
11.1 Earnings and headline earnings per share
| Six months ended 31 Dec 2017 R’000 |
Six months ended 31 Dec 2016 R’000 |
Year ended 30 Jun 2017 R’000 |
|
| Total comprehensive profit attributable to ordinary shareholders | 64 274 | 28 871 | 102 067 |
| Reconciliation of basic earnings to headline earnings: | |||
| Total comprehensive profit attributable to ordinary shareholders | 64 274 | 28 871 | 102 067 |
| Items attributable to headline earnings | – | – | – |
| Headline earnings for the period/year | 64 274 | 28 871 | 102 067 |
| ’000 | ’000 | ’000 | |
| Attributable shares: | |||
| Number of shares in issue during the period/year | 187 500 | 187 500 | 187 500 |
| Less: Treasury shares | (2 074) | – | (40) |
| Less: Notionally encumbered shares | (7 500) | (7 500) | (7 500) |
| Number of attributable shares in issue at the end of the period/year | 177 926 | 180 000 | 179 960 |
| Wighted average number of ordinary shares for the purpose of earnings per share | 178 631 | 180 000 | 180 000 |
| Basic and diluted earnings per share (Rand) | 0.36 | 0.16 | 0.57 |
| Basic and diluted headline earnings per share (Rand) | 0.36 | 0.16 | 0.57 |
FOR THE SIX MONTHS ENDED 31 DECEMBER 2017
11.2 Net asset value per share
| 31 Dec 2017 R’000 |
31 Dec 2016 R’000 |
30 Jun 2017 R’000 |
|
| Net assets | 1 914 009 | 1 794 230 | 1 867 079 |
| Net asset value per share (Rand) | 10.76 | 9.97 | 10.37 |
12.1 Overview
The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework. The Company’s risk management policies are established to identify and analyse the risks faced by the Company, to set appropriate risk limits and controls and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the products offered.
Through the Company’s activities, it is exposed to a variety of risks that could result in changes to the NAV or its performance.
The main risks the Company is exposed to which could result in changes to the NAV or its performance are: capital risk; valuation risk; market risk (comprising currency risk, interest rate risk and equity price risk); credit risk; and liquidity risk.
These risks are detailed in note 23 of the Notes to the Annual Financial Statements as at 30 June 2017.
12.2 Fair value classification of investments
Financial assets and liabilities carried at fair value need to be classified within the appropriate level of hierarchy on which their fair values are based. The information below sets out the different levels, as well as the classification of the Company’s assets and liabilities where appropriate.
Investments trading in active markets and deriving their fair value from quoted market prices of identical assets are classified within level 1. These prices provide the most reliable fair value classification and the Company does not need to adjust the quoted prices to measure the fair value of investments. The quoted market price used for investments held by the Company is the current bid price.
Investments trading in markets not considered to be active and deriving their fair value from observable inputs other than quoted prices included within level 1 are classified within level 2. These inputs need to be directly or indirectly observable for the investment and can include: quoted market prices for similar assets in active or non-active markets; observable inputs other than quoted prices; and inputs derived or corroborated by observable market date. The Company’s money market investments will typically be classified within level 2.
Level 3 classification applies to investments where observable inputs are not available for the asset to determine its fair value. Unobservable inputs are used to measure fair value where relevant observable inputs are not available. The unlisted investments in Fund Limited Partnerships are within this level.
FOR THE SIX MONTHS ENDED 31 DECEMBER 2017
12.2 Fair value classification of investments (continued)
The financial assets and liabilities measured at fair value in the Statement of Financial Position can be summarised as follows within the fair value hierarchy:
| Level 1 R’000 |
Level 2 R’000 |
Level 3 R’000 |
Total R’000 |
|
| Assets: | ||||
| Unlisted investments | – | – | 729 690 | 729 690 |
| Money market investments | – | 1 141 236 | – | 1 141 236 |
| Accrued income on money market investments | – | 19 035 | – | 19 035 |
| – | 1 160 271 | 729 690 | 1 889 961 |
During the period, there were no transfers of assets from level 1 to level 2 or 3, level 2 to level 1 or 3 or level 3 to level 1 or 2.
The following table presents the movement in level 3 assets during the period by class of financial instrument:
| Unlisted investments 31 Dec 2017 R’000 |
|
| Non-current assets: | |
| Opening balance | 307 939 |
| Acquisitions | 408 396 |
| Realisations and equalisations at carrying value of acquisitions | (11 120) |
| Net gains included in the Statement of Comprehensive Income | 24 475 |
| 729 690 |
The Board of Directors has approved the valuation method for level 3 investments as set out in the accounting policies. The valuation techniques used and the inputs available to determine the fair value of each investment, are detailed in note 4 of the Notes to the Annual Financial Statements as at 30 June 2017. The inputs available to the Investment Advisor to determine the valuation of the underlying Portfolio Companies, from which the NAV of the Funds is derived, are mainly the maintainable earnings of the relevant companies and valuation multiples that are derived from the public markets.
The main inputs available to the Investment Advisor to determine the valuation on a case-by-case basis for each of the underlying Portfolio Companies, from which the NAV of the Funds is derived, are: maintainable earnings, trading multiples and capital structures. Earnings, for instance EBITDA, can be based on budgeted EBITDA, most recent or historic reported EBITDA, last-12-months EBITDA or EBITDA adjusted to a normalised earnings level.
Trading multiples are determined by identifying comparable public companies based on, for instance, their industry, size, growth stage, revenue generation, and strategy. Once a public company’s trading multiple is calculated, the Investment Advisor can then adjust the multiple for considerations such as illiquidity, capital structure and other differences between the public company and the Portfolio Company, based on company–specific facts and differences. The Investment Advisor can also, in addition to the original transaction multiples, consider recent private transactions in similar securities as the Portfolio Company or third-party transactions, and adjust the trading multiples as deemed appropriate.
FOR THE SIX MONTHS ENDED 31 DECEMBER 2017
12.2 Fair value classification of investments (continued)
The capital structure of each Portfolio Company determines the ranking or distribution waterfall of how the fair value is allocated, firstly, to each type of security, and secondly, to each holder of such securities, for example, taking into consideration preferred rights or incentive schemes upon an exit scenario, possible earn-out payments, etc. Other subjective inputs to use might be based on the Investment Advisor’s assessment of the quality of earnings, third-party external debt, comparability differences and probability of default.
All these numerical and subjective inputs are recorded and maintained, for each Portfolio Company, in a valuation model designed and updated by the Investment Advisor. The Board of Directors has no direct access or input to these valuation models or the subjective assessments that were considered in deriving the fair value and are not reasonably available to the Board. All these inputs and considerations are largely interdependent and subjective, and the models are highly complex for an outside party to manage. Therefore, it is not reasonable, and potentially misleading, for the Board to determine and present to the shareholders of the Company a sensitivity analysis of the potential impact of changes to one or more of the underlying inputs to fair value.
12.3 Interest rate risk
Interest rate risk is the risk that the value of a financial instrument will fluctuate based on changes in market interest rates. The Company has exposure to interest rate risk through its Temporary Investments (money market investments) that are largely invested in fixed rate instruments and floating rate notes with a relatively short re-pricing period. The fair value of the money market instruments is largely dependent on the market interest rates and could fluctuate with changes in the latter.
The performance, maturity profile and sensitivity analysis of Temporary Investments are reviewed regularly and Ashburton aims to match the liquidity profile with the Company’s liquidity requirements to optimise the returns. The Temporary Investments are managed by Ashburton under an investment management agreement that sets certain permitted securities and limits within which they have to manage the portfolio to provide a balance of risk and returns that the Board is comfortable with.
The table below demonstrates the sensitivity in the fair value of the Temporary Investments held at 31 December 2017 based on assumed changes to the market interest rates (measured in basis points (“bps”) at different intervals and taking into account the maturity dates of the securities.
| Fair value adjustment 31 Dec 2017 R’000 |
|
| Change in market interest rates assumed: | |
| -75 bps | 1 959 |
| -50 bps | 1 306 |
| -25 bps | 653 |
| +25 bps | (653) |
| +50 bps | (1 306) |
| +75 bps | (1 959) |
There have been no material events after the reporting date that would require disclosure or adjustment to the Summarised Interim Financial Statements for the six months ended 31 December 2017
EPE Capital Partners Ltd (“Ethos Capital” or “the Company”) is an investment holding company, registered and incorporated in Mauritius and listed on the JSE Limited (“JSE”). It invests directly into Funds or Direct Investments, managed by Ethos Private Equity (Pty) Limited (“Ethos”), which give the Company indirect exposure to a diversified portfolio of unlisted private equity-type investments (“Portfolio Companies”). By nature, private equity is a long-term investment, requiring long-term thinking and a patient strategy.
Directors
Yvonne Stillhart (Chairperson)
Derek Prout-Jones
Kevin Allagapen
Michael Pfaff
Yuvraj Juwaheer
Senior Advisors
Jean-Pierre van Onselen (CFO)
Peter Hayward-Butt (CEO)
Investment Advisor
Ethos Private Equity (Pty) Limited
35 Fricker Road
Illovo
Johannesburg, 2196
Company Secretary and Registered Office
Ocorian (Mauritius) Limited
4th floor,
Standard Chartered Tower
19 Bank Street
Cybercity
Ebene
Mauritius
Auditors
Deloitte & Touche
Level 7, Standard Chartered Tower
19 Bank Street
Cybercity
Ebene
Mauritius
Deloitte & Touche
20 Woodlands Drive
Woodmead
Sandton
Johannesburg, 2196
Listing
JSE Limited
Abbreviated name: ETHOSCAP
JSE code: EPE
Sector: Financials – Speciality Finance
Transfer Secretary
Computershare Investor Services (Pty) Ltd
Rosebank Towers
15 Biermann Avenue
Rosebank, 2196
Sponsor
Rand Merchant Bank
1 Merchant Place
Cnr Fredman Drive and Rivonia Road
Sandton
Johannesburg, 2196
Johannesburg
DATE:
19-03-2018
SPONSOR:
RAND MERCHANT BANK (A division of FirstRand Bank Limited)
