Under the stewardship of one of the youngest, if not the youngest, executive teams on the JSE, Makalani Holdings has just concluded what it considers an “active” quarter. It has spent R443-million of R2,5-billion of shareholders’ funds, or 17%, since making its debut on the bourse in May.
CEO Vusi Mahlangu (35) and chief investment officer Sydney Mhlarhi (32) reflect with contentment, but acknowledge they would have liked to spend more.
“We would love to spend all the money,” says Mhlarhi, “but you have to spend it wisely.”
The company is the first listed black economic empowerment (BEE) financier. It is a groundbreaking idea. The company allows anyone who believes in BEE and its future to put their money where their mouth is and buy its shares and, as commentators noted at its launch, allows the market to decide if BEE funding is a viable investment. Its launch advertising campaign asked why no one had thought of listing a BEE funder. But perhaps a more pertinent question is why the idea seems to work now?
Mahlangu explains it using the classic view of BEE as going “in waves”, the first of which began in the early 1990s and saw deals being financed on the back of share price increases. It all came undone in the market crash of 1998.
What makes Makalani work now, according to Mahlangu, is that banks are doing more in BEE as funders, advisers or conducting deals themselves. The higher levels of activity bring about more players. “But most importantly,” says Mahlangu, “Makalani works because of the Financial Sector Charter”, and the funding commitments it demands of its signatories.
Makalani is the brainchild of Rand Merchant Bank. Leon von Molkte, of RMB’s corporate finance division, says Makalani was created to bridge the gap between private sector funding for BEE companies and financial institutions’ inability to meet their Financial Sector Charter obligations, largely due to regulatory constraints. Makalani is designed to provide mezzanine funding, a higher risk funding that stands between pure debt and equity. Both its interest and capital are paid after that of other debt.
RMB Asset Managers are shareholders along with Coronation Fund Managers, Investec Asset Managers and Stanlib, among others. The share debuted at R101 and has touched a low of R91. On Tuesday, it was trading at R98,30. This is below its net asset value (NAV) of R100,96. In the period since its listing, it has offered 13,8% while the investment companies index, of which it is part, has gone up 22%.
The company is aware of its limitations and does not fund small and medium-sized businesses. Mhlarhi explains that the company would rather lend out a bulk amount of, say, R100-million to institutions that are focused on small, medium and micro enterprises “as they have the systems to monitor investments”.
The company has no sector focus, but is guided by the criteria that the money it lends out “must come back and come back with a return”. The investments must also be sizeable, with minimum amounts of R25-million being considered and an investment period of at least five years. Makalani has invested in companies such as Reuel Khoza’s Aka Capital empowerment deal with packaging giant Nampak through preference shares of R44-million. It has also supported the Metropolitan empowerment deal with Eric Molobi’s Kagiso through preference shares worth R50-million. Other deals are with Tokyo Sexwale’s Mvelaphanda subsidiaries, Jakes Gerwel’s Brimstone, Cyril Ramaphosa’s Shanduka Group and Sipho Pityana’s Izingwe Capital.
The portfolio looks robust, but given that it is of established BEE players in deals with established companies including top 40 stocks, is Makalani not just extending what banks are doing? Mahlangu offers Izingwe as a fairly new player, with the funded deal being Makalani’s first. But the deal with cable company Aberdare is underpinned by solid cashflows, of R600-million per year, to which Izingwe gained immediate access when it purchased a 30% stake. When are they going to fund an unknown black company to the tune of R250-million? Mahlangu notes: “The best result is always action.” Exactly, so when then? “We would like to take more risk,” he says, “but we cannot lose money, we are custodians of other people’s wealth.” He argues that they are taking on risk by providing mezzanine financing.
Von Molkte describes Mahlangu and Mhlarhi as “exceptionally diligent and thorough individuals”. They had approached RMB to start a venture of their own when this opportunity arose. Mahlangu had been at Investec’s structured finance division for the past six years while Mhlarhi, a Wits-trained chartered accountant, had been with Standard Bank corporate finance division. Mahlangu feels their respective background in debt (structured finance) and equity (corporate finance) gives them a complementary skills base.
Now, they, like the rest of the investment community, are looking at infrastructure spending. The challenge is to unlock value through empowerment and targeted investments.