Edition: July / September 2016 Edition
Editorials

FINANCIAL SERVICES

From small acorns . . .

Or, in the case of African Rainbow Capital, not so small.
An oak could be in the making.

Come with a fresh concept, backed by talent that’s supported by resource, and there’ll always be room for disruptive competition even in the SA financial-services sector dominated by an establishment of heavy hitters. Donald Gordon demonstrated it when he founded Liberty, as did Adrian Gore when he launched Discovery.



Motsepe . . . step further

Along now comes Patrice Motsepe, with his billions, to set African Rainbow Capital in motion. Equally important, he comes with Johan van Zyl and Johan van der Merwe whose business records are proven respectively as former Sanlam Group and Sanlam Investments chief executives. Add to the top ARC executive team Machiel Reyneke (a Santam director) and Rejoice Simelane (who sits in a non-executive capacity on the Sanlam board, as do Motsepe and Van Zyl) for a rather distinctive corporate pattern to emerge.

There’s a certain romance in all this. Almost a century ago, Sanlam was conceived by a group of Afrikaners and a Scotsman essentially to mobilise the savings and promote the economic uplift of those who shared a particular cultural affinity. There was business potential and a social mission, fully realised in their unfolding.

Today, of course, black economic empowerment is a business imperative. Going further than broad-based shareholder schemes is black control. This is ARC’s distinguishing characteristic in its self-proclaimed objective to become “a leading provider of financial services covering the full spectrum of fiscal needs such as life insurance, health care, asset management, general financial services, short-term insurance, private equity, property and banking”.



Van Zyl . . . solid underpin

Another characteristic is its mitigation of entrepreneurial risk. Matsepe starts ARC with a silver spoon through the immensely profitable participation of his Ubuntu-Botho Investments (UBI) as the empowerment partner of Sanlam, of which he remains deputy chairman, and through the ongoing relationship with Sanlam itself. This is a clever initiative, probably not without commercial advantage also for Sanlam to the extent that it can direct complementary business to a soundlystructured black enterprise.

ARC is wholly owned by UBI whose shareholders include trade unions, church and women’s groups. UBI, chaired by Motsepe as its principal shareholder, owns 14,5% of Sanlam. Worth some R17bn, about R10bn of it is committed to invest in ARC. For its part, ARC has already made several privateequity investments from insurance broking to fibre broadband.

Apart from its obvious intent to create value for stakeholders, ARC promises to make a difference on “a much broader front by supporting deserving communities through wide-ranging social and corporate investment initiatives”.

Van Zyl, ARC joint chief executive with Van der Merwe, was asked to elaborate.

TT: What is ARC’s existing capital base? If you intend to extend it within the next year or so, by about how much?

Van Zyl: The base of ARC’s holding company, Ubuntu-Botho Investments, is more than R13bn. Of this, R5bn has been initially allocated to ARC. With gearing, it implies that ARC can possibly do deals of roughly R8bn. Of course, over the longer term we can use more of UBI’s resources, and add to both UBI and ARC through raising capital. Both mechanisms are contemplated over the medium term. Plans are to use around R8bn-R10bn of UBI’s funds over the longer term, and then to double this through raising capital in the market. With gearing, it would give us more than R20bn.

What sort of timelines do you envisage to become, quoting from the ARC website, “a fully integrated diversified financial services business in SA”?

Initially ARC will acquire strategic stakes in a number of businesses, much like an investment holding company. We will then strive to unlock synergies between these businesses and integrate them. It should take five to eight years for us to go through the whole process.

In becoming such a financial services business, what will be the relationship with Sanlam? For example, what areas of competition and cooperation? Are there agreements on cooperation and, if so, in what areas? Conversely, how will competition be managed given that three ARC directors are also Sanlam directors?

The idea is not to invest in other insurers so that, where possible, we don’t compete with Sanlam. Our focus will be mainly on distribution and other areas complementary to what Sanlam has. The main cooperation will be in areas where black economic empowerment is important. These include distribution in general, asset management, employee benefits and its administration in particular; also health admin, banking, property and the like. Most of this is contained in a long-term agreement. However, this should be seen against the fact that ARC is independent and will do what it considers beneficial to itself.

ARC has mentioned “accumulation of capital in partnership with Sanlam”. What does this mean? Is Sanlam an ARC shareholder and, if so, how much of ARC does it own?

Sanlam is not an ARC shareholder at present. But if we raise capital in future, we certainly hope that Sanlam will invest some of its funds in or with ARC.

Does the relationship with Sanlam preclude relationships with other life offices, or with other financial institutions such as banks?

No, nothing is precluded. But we clearly have a big stake in Sanlam and therefore such other relationships will probably be more focused rather than broad-based as is the case with Sanlam.

Will you entertain investment in ARC and/or ARC projects from SA institutions other than Sanlam?

Certainly.

Plans to list ARC on the JSE in the foreseeable future?

We’ll first have to make ARC work. But a JSE listing is certainly something that we’ll entertain over the longer term i.e. eight to 10 years from now.

Given present economic conditions globally and in SA, was there any particular reason for your timing to launch ARC now?

Our view is that there are a number of good assets available at attractive pricing because of the tough conditions. It is always better to buy in a depressed market, rather than when companies are expensive. This did play some role in our decision-making.

Apart from black control, how would you describe the main differentiators between ARC and other SA financial institutions? Put differently, why do you consider that there’s a need for ARC at all?

Most financial companies in SA need a BEE partner. Few potential partners have the money, relationships and experience that can support the companies’ own objectives. The combination of these attributes gives us an edge. Also, as we essentially try to be strategic partners, working with and supporting existing management teams rather than trying to take them over, they’ll find that the package we offer is particularly attractive.

From the perspective of potential clients, what would you see as the main selling points of ARC that are unique in the SA marketplace?

In addition to the factors already mentioned, a key focus is our dual objectives. These are to make money and, by ploughing back, to make a difference. We strive to be world class in doing business, and then to give back to deserving causes a substantial part of the profits generated. Patrice Motsepe has signed up to the ‘Giving Pledge’ initiative of Warren Buffett and Bill Gates, for giving away 50% of his wealth during his lifetime. Also, we have a community trust owning 20% of UBI.

The building blocks are in place, doubtless for close scrutiny by a highly competitive financial sector as building proceeds.