Will the PIC act on Jayendra Naidoo’s Lancaster for almost R10 billion loss?
Business Report (BR) published an article earlier this week questioning how it was possible that investment executives at Africa’s largest asset manager, the Public Investment Corporation (PIC) – with a wealth of experience of more than 100 years collectively – could claim to have made wrong decisions?
We asked if this means the PIC could now withdraw from any investment should they experience a bout of regret by taking the targeted investee company to court and suing the investee over its own “bad” decision.
I’m following the PIC’s court case against AYO, currently in the High Court in Cape Town.
I am more than intrigued, quite frankly, I’m shocked.
Checking the recordings of the Mpati Commission of Inquiry the other day, and lest we forget, an entire inquiry constructed to destroy AYO, I cannot help but wonder why, yet again, AYO is being attacked, when on record, so many other of the PIC’s investments during that period were called into question.
Are we headed for Mpati Commission V2 where AYO, once again, becomes the fall guy for the PIC’s own inadequacies?
During the Mpati Commission, I was even told by a PIC executive, “just another day at the AYO Commission of Inquiry”.
The Mpati Commission dragged on for almost a year – mostly at a cost to the GEPF’s (Government Employees Pension Fund) pensioners, who ultimately foot the bill for the PIC’s litigation efforts. Same in the case of AYO and every other company that is either suing the PIC or vice versa – and there are a lot more than we think.
It is worth noting that although AYO has never been found guilty of fraud or corruption by any court of law, the PIC has taken a litigious approach towards it. This is not only incongruent with the treatment of other companies, but one could argue, discriminatory too.
On that note, I looked at some of the articles I wrote at the time of the Mpati Commission and as an example of how differently AYO has been treated, one cannot get much better (or worse), than that of the PIC’s “reckless” investment into unlisted Lancaster 101.
At the time, former executive head of risk and compliance at the PIC, Paul Magula, told the PIC Commission of Inquiry that “the asset manager took a reckless naked position with regard to the Lancaster 101 transaction”.
Lancaster 101 is the black empowerment partner of embattled retailer Steinhoff International Holdings, owned and led by former trade unionist Jayendra Naidoo.
The deal Magula referred to was completed just six months before Steinhoff collapsed. Magula said the Lancaster transaction was approved without credit risk seeing the outcome of the internal audit report concerning the transaction.
“That shows complete disregard for governance tools. R9.3 billion was approved without considering risk opinion, and now R5bn has been impaired as a result.”
He said Citibank would not lose a cent on Steinhoff funding: “Steinhoff will get their full R6.3bn provided for Steinhoff Africa Retail (Star) funding, as the PIC covers them through subordination of security.
“Citibank took a commercial view, and the PIC simply took a reckless naked position,” he said.
Magula was part of the PIC executive committee under the leadership of the then-chief executive Dr Daniel Matjila. He also formed part of all executive committees within the PIC, including, among others, the Portfolio Management Committee (PMC) and the Information Technology and Risk Committee.
“Most discussions on Steinhoff where the GEPF lost money, mainly focused on the listed side, but never on the unlisted side, where PIC gave R9.3bn to … Lancaster. The purpose of the financing was for Lancaster to acquire shareholding in Steinhoff International.
“When Lancaster approached the PIC, the shareholding was to be 100% to Naidoo. The shareholding was then changed and became as follows: GEPF 50%, Naidoo 25% and Community Trust 25%,” Magula testified at the time.
The Lancaster deal was done in two phases:
Phase 1: PIC to give Lancaster R9.3bn, secured by both shares and full cover collar structure (insurance against share price drop). The PIC was supposed to be guaranteed a capital return “if anything was to happen to the investment”.
Phase 2: Restructuring of the transaction wherein the PIC was to partially forego its security to another lender, Citibank, without getting paid for the subordination of security. Citibank funded Lancaster (empowering the same Naidoo) Investment in Star to the tune of more than R6.3bn.
Magula said: “We considered the risk regarding the Lancaster transaction and restructuring too high due to the following: the structure reflected an impairment on interest payable due to share price performance; reputational risk was considered to be very high. We did not find comfort on the downside protection of our loan to Lancaster and, therefore, PIC was taking an equity position in a loan structure without the upside.
“In a way, we felt PIC was naked, because shares are not the best security for debt,” he said.
Magula said that, after the Steinhoff scandal, PIC had to write off almost R5bn from one transaction. He reiterated that the loss suffered amounted to reckless investment decision-making to enrich one individual. For the GEPF, the debt-funded exposure never made commercial sense. “No commercial bank would have funded with the same structure,” said Magula.
PS: Lancaster was also the adviser to the deal, earning millions in fees. Lekker – you bring a deal to the PIC to fund YOU, and you even earn commission.
Let me ask again: Will the concerned PIC go after Naidoo and get the 'reckless money' back?
Adri Senekal de Wet is the executive editor of Business Report.
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