Issue: September 2012 / November 2012
Editorials

PUBLIC INVESTMENT CORPORATION

Welcome controversy

The PIC has pronounced on Avusa, implicitly on private equity too. Let the spotlight shine in turn on the PIC also.

Every now and then, the Public Investment Corporation jumps into the limelight. It happened prominently when then chief executive Brian Molefe shouted the odds over black empowerment, or the lack of it, at certain JSE-listed companies he’d targeted. It happens regularly whenever the PIC reviews its allocations to external asset managers, once again due. It can also happen unpredictably, as in its opposition to the Mvelaphanda takeover of Avusa.

On each occasion, controversy abounds. In turn, however, the PIC is rarely challenged on larger fundamentals: whether it should continue to exist in its present form, wholly owned by government; whether, as a multi-manager, it’s in justifiable competition with the multi-managers of the private sector; whether it shouldn’t simply be collapsed into the Government Employees Pension Fund that supplies 90% of its revenues; or even privatised, tangibly to show the world what this government thinks of the pro-nationalisation lobby.

These are hectic policy questions, not to be answered lightly and not to cast aspersions on the PIC. They’re raised now because, in the outcry over Mvela/Avusa, it’s been denied as forcefully as it was alleged that the PIC is vulnerable to intervention of personalities in the governing party (see box). The questions about the PIC’s fairness will also bubble with its announcement of new external asset managers, but quietly because the PIC is too powerful to confront.

The heat needn’t obscure the light. First and foremost, it’s never been contended that the PIC is anything less than highly professional. As significantly, for those who suspect it abuses captive clients, its 2011 annual report proclaims that its fees “remain significantly below industry levels”.

Perhaps this is unsurprising. The larger the size of assets under management, economies of scale enable proportionately lower fees to be charged. Celebrating its hundredth birthday last year, the PIC reached another milestone in celebrating R1 trillion under management. Nobody else comes close.

Further, the bigger chunk of the PIC portfolio is passively managed. This attracts lower fees than active management. A smaller chunk is parcelled off, in differing amounts, to some two dozen external managers in the private sector who vie for allocations.

Then, unlike managers in the private sector, the PIC appears not to be under dividend pressure. In 2010 it paid government a dividend of R79m, whereas in 2011 it paid zero.

For all the advantages in being able to offer lower fee structures, last year the PIC made a pre-tax profit of R147,1m. Of the R346,6m earned in management fees, R247,3m went on operating expenses mainly for personnel and information technology. It’s the sort of money that can buy a lot of skilled people and a lot of modern technology.

Might it not be considered that they become part of, rather than separate from, the GEPF to effect rationalisations for greater economies; alternatively, that it be privatised to create a more level playing field with multi-managers in the private sector keen to compete for GEPF business?

It certainly isn’t unusual for such large pension funds as the GEPF to employ asset management and related services in-house. During recent years the GEPF has moved the registration of scrip from the PIC into its own name, deployed the PIC as an agency (e.g. to act on mandates formulated by the GEPF), and strengthened its own research capability (e.g. on voting policy as well as developmental, infrastructure and sustainable investment).

“Whether the PIC should be collapsed into the GEPF is a policy question,” says PIC chief executive Elias Masilela. “In that regard, I would not be able to comment as this responsibility lies elsewhere.” However, he points out: “Empirically, various models and permutations obtain around the world with varying measures of success.”

Over the years, the PIC has mutated. From having been a government “commission”, it’s been “corporatized” with government as its sole shareholder. From having held strategic assets on behalf of government, these have since been sold.

“All holdings are now fundamentally driven from a value perspective as well as mandated guidelines from our clients, particularly the GEPF,” Masilela notes. “We are now an independent asset manager with no government interests being driven via the investment portfolio, except for the mandated investments as per our client (GEPF) investment mandate.”

Better believe it, especially in the turmoil over Avusa. The broader policy issue is whether that’s where the PIC’s mutation ends.

CONSPIRACY THEORIES

SA is afflicted by Manguang paranoia. Just about anything that might remotely involve the ANC is attributed to presidential jockeying prior to its December conference. Even before the PIC announced its decision on the Mvelaphanda bid for media group Avusa, where the PIC has a 17% swing vote, the rumours started.

The “logic”, if that’s what it may be called, was that Mvela is associated with Tokyo Sexwale. Should the Mvela group wholly own Avusa, Sexwale could use the Sunday Times to advance his candidature for the presidency against incumbent Jacob Zuma. This would be prevented by a phone call from one Pretoria office to another.

The Mvela/Avusa circular, which announced the bid, listed the institutional shareholders that had offered irrevocable undertakings to support it. The PIC was not amongst them. The PIC was then asked by TT to comment on whispers that it had been “instructed”, for political reasons, to vote against it.

A fortnight later, when the PIC formally announced its opposition, chief executive Elias Masilela responded: “I may, without a doubt, say that the whispers are not true. Our position on this stock is corrected in our public statement.”

Indeed, the public statement is an indictment of Avusa. Although the large Avusa shareholding of the Mvela associated with Sexwale has significantly reduced, “perceived collaboration” between Mvela-related parties (including private-equity group Blackstar) renders them the controlling shareholders. “This business underperformed with Mvelaphanda being one of the significant shareholders, and therefore their continued influence via this controlling block is of concern to the PIC,” it says.

Isn’t this a good reason for the PIC, like the other institutional investors, to use the opportunity for exit?

Avusa’s average operating margin for the last three years was 6,5% and declining, adds the PIC: “With the new debt on (from the proposed private-equity deal), the operating margins will have to be north of 7%...for a business that is still in the doldrums.”

Isn’t that another good reason to get the hell out?

Finally, the PIC condemns Avusa for having no strategy of investment into Africa. Yet it was hardly vociferous when Avusa over lost over R80 in less than two years from attempts to establish operations in Nigeria and Kenya.

Where does active share-ownership stop and micro-management start? And what does the PIC stance say about private equity which, for the sort of the risk/reward potential identified in an Avusa-type situation (TT June-Aug ’12), is now allowed by the revised Regulation 28 a higher allocation in the portfolios of pension funds?

The PIC is not a law unto itself. It operates under mandate from the Government Employees Pension Fund. In turn, the GEPF has a board of trustees (half representing government as the employer, the other half representing fund members) who have a fiduciary duty to the fund alone. The PIC can vote only in terms of its mandate, not in accordance with a discreet phone call from any other Pretoria office.

So forget whether there was such a call. Much more instructive, for an evaluation of public versus private equity arguments that pension funds might increasingly face, is the Avusa case study. At this early stage of the new Reg 28, the PIC has fortuitously focused the mind.