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Ethos aims high

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’n Voetganger stap verby die ingang na die JSE in Sandton. Foto: Dean Hutton, Bloomberg
’n Voetganger stap verby die ingang na die JSE in Sandton. Foto: Dean Hutton, Bloomberg

Ethos Private Equity is confident it will maintain its track record of achieving high returns, despite one of its existing multimillion-rand funds underperforming, as it looks to launch Ethos Capital via a JSE listing in the speciality finance sector early next month.

Peter Hayward-Butt, Ethos Capital CEO, this week said the company was positive it would achieve a gross return of between 25% and 27%.

From its establishment in 1984 as a division of First National Bank, Ethos puts it gross internal rate of return at 37% and, since 1996, it has achieved a return of 27%.

Private equity is capital provided by wealthy individuals and institutions. This capital is used to buy stakes in companies with the intention of holding the stakes for a number of years while growing the target company and then selling for a profit.

During an investor presentation, Stuart MacKenzie, Ethos Private Equity CEO, said the firm had completed 104 deals in South Africa and other sub-Saharan African countries, including 91 deals that have been wrapped up, and had invested R10.3 billion.

Ethos Private Equity, which will take an initial 1% stake in Ethos Capital, employs 61 staff, including 15 partners, which makes it the largest private equity firm in sub-Saharan Africa.

A blot on Ethos’ track record is its investment in Nigeria’s Oceanic Bank. In November 2007, a consortium comprising Ethos Private Equity and Old Mutual invested $130 million (R1.9 billion) in Oceanic’s public offering.

However, by 2010, Cecilia Ibru, the former head of Oceanic Bank, was sentenced to 18 months in prison for fraud and ordered to hand over $1.2 billion in cash and assets, according to the Financial Times.

The failure of Oceanic Bank has caused Ethos’ $750 million Fund V, which was started in 2005, to underperform and its gross return is sitting at 12%, compared with its previous Fund III at 26% and Fund IV at almost 28%. Fund V won’t be part of Ethos Capital and the fund is set to be wrapped up in the next 18 months.

“That fund is underperforming the benchmark ... We also had an investment in that fund that was written down to nothing – it was an investment in a Nigerian bank, Oceanic. It was a very unpleasant experience for us. There was wholesale fraud in that bank and the CEO landed in prison. We, along with a host of other investors, had to write off a significant amount of capital,” MacKenzie said.

“Clearly, we have adapted our investment thesis for sub-Saharan Africa to ensure we are managing those kinds of risks.”

Hayward-Butt said Ethos was “very cautious of sub-Saharan Africa” and would ensure it had deep relationships with people invested in its targeted parts of the region, and the company would recruit top people as part of its sub-Saharan Africa strategy.

It was difficult to do business in Nigeria, but there was a massive opportunity, he added.

“It’s about how to get the honeypot without making the mistakes,” Hayward-Butt said.

MacKenzie said the listing was largely driven to bring new money into Ethos’ funds and to give investors access to private corporate investment.

Hayward-Butt said about 2% of local equity investment was in private equity, compared with up to 20% in other parts of the world.

Ethos operated in the realm of small to medium-sized companies valued between R1 billion and R7 billion, MacKenzie said. The company focused on entrepreneurial companies and “noncore” assets that could grow, he added.

Ethos is looking to raise up to R2 billion from the JSE listing, mainly from individuals or institutions that can put up at least R1 million in funding. So far, Ethos has raised R1.076 billion, including R920 million from institutional investors.

In addition, R156 million is coming from Ethos Private Equity and Ethos nonexecutive directors. The capital raising closes on Friday. The listing will take place on August 5.

Grant Morris, a ClucasGray analyst and portfolio manager, said the reason the company was investing some of its clients’ money into the listing of Ethos Capital was based on a long-term view that Ethos had a highly competent management team with a track record of growing the value of private equity investments and the “astute use of leverage”.

“I must stress that this is an investment that is long term in nature,” Morris said.

The prospective private equity returns from Ethos also offered the ability to provide diversification from traditional listed equity investments, he added.

Omri Thomas, director at Abax Investments, said Abax had invested in Ethos Capital because the company was one of the most credible local private equity players.

“Ethos had a long track record of investing in businesses and getting a good return,” he said.

“We can associate with the businesses that Ethos invests in. These businesses are highly cash generative and have high-return assets with low forecast risk. Management are credible, ethical players,” Thomas said.

There was a lack of listed private equity vehicles on the JSE, and Ethos would follow in the footsteps of Brait, which was “a tremendous success”, and give JSE investors access to private equity, he added.

Ethos Capital will consist of four funds: the $805 million Fund VI; an up to R10 billion buyout fund that will be launched this year or next year; an up to R3 billion “mid-market fund” that has been launched; and an up to R2 billion mezzanine fund, which is a hybrid of debt and equity that will be launched
this year.

The “mid-market fund” will be Ethos’ BEE fund.

Hayward-Butt said the “mid-market fund” would help Ethos easily find BEE partners and it would also be used to “consolidate the BEE space”.

Ethos has invested in local companies such as Alexander Forbes, Tiger Wheel & Tyre, Defy, Sportsmans Warehouse, Dunlop and Wimpy.

MacKenzie said that Ethos did not invest in deep-level mining, property, infrastructure, and companies invested in the “sin” sectors, such as tobacco and alcohol.

“The consumer story is definitely part of Ethos’ thesis ... We are about value opportunities ... Current themes we are looking at are business services, industrial services related to infrastructure roll-out, healthcare and education,” he said.

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