Public Investment Corporation’s unlisted investments are opaque and problematic

Although the Public Investment Corporation (PIC) has heeded long-repeated calls for it to improve disclosures of its investments worth billions of rands in entities that are not publicly traded, the disclosures do not go far enough.

By 31 March, the PIC had injected about R100-billion in loans and equity finance into 145 privately owned businesses to enable transformation and impact investing, mainly through its Isibaya Fund. The PIC invested this money on behalf of the Government Employees’ Pension Fund (GEPF), the Unemployment Insurance Fund (UIF) and the Compensation Fund, to generate a return for these funds.

On Wednesday, 2 October, the PIC released the full list of the 145 investee companies. These included African Bank (financial services), Airports Company South Africa (owner of airports), Edcon (retail group that owned Edgars), Independent Media SA and Sekunjalo Independent Media (media companies), Heineken South Africa (beverage company), VBS Mutual Bank (defunct bank), and ZAR X (defunct stock exchange).

This disclosure is opaque as the PIC didn’t indicate how much money was invested into the investee companies, which of the investments (loans or equity financing) in companies were performing and non-performing and which were delivering positive or negative returns. Such disclosures are important to ascertain whether the PIC is delivering returns for its clients such as the GEPF, which manages the pension savings of current and retired public servants and is backed by taxpayers.

Recent amendments to the Public Investment Act require the PIC to disclose the full list of its investments in listed and unlisted companies and its annual report. The PIC’s disclosure is also seen as an act of good governance as its portfolio of unlisted investments was previously marred by corrupt deal-making. A prominent example of tainted deal-making was the PIC sinking more than R300-million into VBS Mutual Bank — funds that had to be written off by the GEPF because the bank is now defunct.

Read more: PIC-deployed VBS looters must pay back R23.4m, court orders

Another soured loan on the books of the unlisted investment vehicle was the PIC sinking more than R1-billion into Allied Mobile, a now-­defunct company incorporated in the Bahamas with operations across South Africa, Zambia, Kenya, Rwanda, Namibia, Mozambique and Botswana.

Read more: Three years on, PIC is still chasing billions it lent to Allied Mobile

Other questionable and potentially soured loan and equity finance investments include those in Sekunjalo, Independent Media, Edcon and ZAR X.

Underperforming unlisted investments 

Governance concerns about how the PIC concluded investments during the State Capture years gave rise to President Cyril Ramaphosa establishing the Mpati Commission to probe the allegations over nearly eight months in 2019.

The commission gave a glimpse into the distressed nature of the PIC’s unlisted investments. The commission heard that 41% of the R123-billion of the PIC’s unlisted investments were on watch, underperforming, or the investee companies were not servicing their PIC loans.

The PIC has long argued that unlisted investments make up less than 10% of its total investments worth R2.69-trillion, and because of this, losses or write-offs are not material in its investment ecosystem. This argument was repeated by the PIC’s chief investment officer, Kabelo Rikhotso, on Wednesday, when he said unlisted investments made up only 5% of the PIC’s total investments. Thus, the performance (or losses) of the investee companies does move the needle on total assets under management.

Arguably, any loss is significant and has to be funded by the fiscus or taxpayers. In previous years, the losses in the unlisted investment portfolio were between R30-billion and R40-billion, which exceeded the employer’s (the state or National Treasury) contribution to the GEPF. In previous years, the Treasury’s annual contribution to the pension fund averaged R37.7-billion.

The Mpati Commission flagged this as a problem.

“All of this [losses incurred under the unlisted investment portfolio] makes the ability to absorb write-offs and losses precarious which, by definition, is the opposite of prudence,” said the commission.

“Any 2% capital loss, when the fund is potentially not fully solvent [in terms of the actuarial valuation reflecting the funding level of long-term liabilities], is a significant loss to what should be capital reserves or a buffer.”

The PIC also revealed that 30% of its portfolio of unlisted investments were problematic transactions. In other words, the portfolio incurred a 30% credit loss ratio, which refers to money lost due to, among other reasons, customers or investee companies defaulting on loan repayments. Asset management firms in the private sector, including Coronation and Allan Gray, limit their loss ratio to less than 5%, and even that figure is considered problematic and controversial.

Another pain point for the PIC is that total returns generated by its portfolio of unlisted investments are lower than its self-imposed targets. The PIC set a target of its portfolio generating a return of 9.99% over 36 months. According to its annual report, the portfolio had generated a return of 6.07% by 31 March. For this underperformance, the PIC blamed the “impairment [or writing-off] of non-performing assets”.  DM