African Rainbow Capital (ARC) was formally launched by South Africa’s leading businessman Patrice Motsepe in 2015 as an investment holding company that acquires significant minority shareholdings in companies across select industries to improve their black economic empowerment (BEE) status. ARC provides BEE credentials via its parent company Ubuntu-Botho Investments – an entirely black-owned financial services entity that was created by Motsepe in 2004 out of his vision to make a difference in the lives of ordinary South Africans. Since its introduction as a means of eradicating the effects of Apartheid, BEE has remained a vital consideration for almost all businesses in South Africa, although some sectors, such as mining, have higher legislative requirements than others like financial services and retail.
“All in all, there is a scorecard that companies must adhere to, where points are made through black ownership, black employment, procurement from BEE players or from investing in corporate social imbursement,” says ARC’s co-chief executive officer Johan van der Merwe.
Therefore, being a fully black-owned and controlled company makes ARC an attractive proposition for South African companies looking to boost their BEE scorecard while also partnering with an investor that can provide capital and add value.
ARC initially focused on building a portfolio of investments in financial services platform assets before broadening its interest into non-financial services businesses across a wide range of sectors, including IT, telecoms, business process outsourcing (BPO), construction, agriculture and mining.
This expanding investment strategy has created a diversified portfolio which has increased in value by more than 80% to R9.6 billion since the company listed on the Johannesburg Stock Exchange in September 2017.
When considering an investment, ARC will look to invest a minority stake in an early stage business with significant capital growth potential, and one that would also provide strong synergies and cross-selling opportunities within its existing investments.
“Our strategy first and foremost is to look at areas where we can make a difference in South Africa. Many sectors in the economy are well run, like banking and telecoms, but the costs for the consumer are among the highest in the world.
“What we are trying to do at that level of financial inclusion is broaden the spectrum of people who can benefit from the overall strength of those sectors,” says van der Merwe.
For example, ARC’s flagship investment is a disruptor in the banking sector called Tymebank. South Africa’s first digital bank formally launched in February 2019 and aims to provide simple, accessible and inexpensive banking services that are designed from the ground up with consumers in mind.
The bank charges no monthly fees and many everyday transactions are also free, unlike some of South Africa’s traditional banks which retain complicated and confusing banking fee structures and regularly charge ‘hidden’ day-to-day transaction fees.
Therefore, TymeBank is a perfect example of ARC’s strategy to invest in companies that can make a difference in South Africa, in that the challenger bank aims to reduce costs for the consumer in one of the country’s biggest industries.
In June, TymeBank received a R200 million investment by private equity group Ethos Artificial Intelligence (AI) fund, which will allow the bank to embark on the next phase of capital raising to facilitate its continued growth in the South African market.
The bank aims to secure two million customers over the next three years, having attracted more than 500,000 clients by early July, which is little over five months since its launch in February.
At the same time, ARC announced that it had made a separate R100 million investment into Ethos AI Fund, having identified the fund as a way of providing access to an ecosystem where new technologies in support of the Fourth Industrial Revolution are optimally commercialised.
A telecoms disruptor
Another of ARC’s major investments is with telecoms challenger Rain – a ‘full service’ mobile network operator that focuses on data as its primary offering as, opposed to voice-based communication. ARC’s 20% stake in Rain resembles R2.3 billion of its total portfolio value.
Rain has made significant progress in building a dedicated national LTE advanced network, holding an allocation in the 1.8 GHz spectrum along with other major operators, and is also the only licence holder in the 2.6-3.6 GHz band – where most of the 5G developments are taking place.
“Our company has put up infrastructure that will drive the cost of data down not by 50% but by 50 times over the next three to four years, to really make the country competitive in this emerging space,” van der Merwe reveals.
Rain has already established a strong partnership with Vodacom, whereby Rain is allowed to install its equipment on towers owned by Vodacom and Vodacom in turn is allowed to obtain available spectrum to sell data to its clients. This resembles a breakthrough deal for the challenger and will help it expand on its 40,000 strong customer base.
While the strength of Rain’s product offering in the telecoms market was enough to pique ARC’s interest, the investment also provided a strong chance to create synergies with existing companies, and this was borne out when Rain announced a partnership with TymeBank to test the distribution of its SIM cards at Tyme kiosks across South Africa.
Moving into mining
ARC’s strategy of investing in early stage companies also extends to the mining sector, where the company has focused on open cast, non-traditional commodity projects away from the high cost underground mining market.
ARC initially acquired a 25% stake in the Elandsfontein mine – South Africa’s largest known sedimentary phosphate deposit, which is being developed by London-listed junior Kropz.
Despite being poorly understood by the general investor community, phosphate is used to produce fertiliser, making it a vital component of the agriculture industry. Again, this is where ARC’s wish to make a difference comes to the fore, considering the importance of boosting food production as populations rise on the continent and globally.
“Elandsfontein is on the West coast of the Cape, close to a deep port harbour so it’s relatively cheap to ship the phosphate out, and we can mine at a fraction of the cost that Morocco [the world’s biggest phosphate producer] does.”
Kropz also owns assets in Ghana and the Republic of Congo which also happen to be large-scale, low-cost deposits. “We have a good package of assets with Kropz. Once we get the technology going on the Western Cape, we can transport that to these other two entities to create a long-term company that can provide phosphate into the market in the longer term.”
In March, ARC released results for the first six months of the 2019 financial year that fell below the company’s high expectations. Intrinsic net asset value edged up just 1% to R9.6 billion in the period, below its medium-term target of 16% growth per year, although the company did outperform the overall equity market in South Africa, which fell by 12% in the same period.
Following the announcement, ARC pointed to a weak economy in South Africa, declining share prices and the writedown in value of its BPO venture Bluespec, but also highlighted its internal policy to place new investments in the costs column during the first six months.
“A big part in the way the results were presented was almost self-inflicted. We put the TymeBank valuation in costs although the intrinsic value is multiples of what we’ve paid for it. Also, the other big investment we made, Rand Mutual Assurance, was also put in costs.
“So, if we were to include our own intrinsic valuations in the report, it would have resulted in a fairly different picture. The expectations are high, but these are fairly long-term expectations,” acknowledges van der Merwe.
Despite the disappointing interim results, ARC’s executive director believes its latest investments are solid assets with strong exponential value that can deliver high returns on equity. “All these businesses offer massive increases in intrinsic value compared to what we paid for them, and in the next six months we think that will come through.
“Even though the economy is tough, we are fairly positive that we may get the intrinsic value up in the order of 5-10% within the next six months,” he concludes.
ARC plans to achieve this through consolidating synergies between its businesses and increasing efficiencies, while also looking to develop its portfolio with new investments, after the company announced that R700 million is available for investment over the rest of the year.