ARC Investments’ bumpy ride for shareholders

ARC Investments (ARCI) shareholders had a bumpy ride over the last five years, with the share price plummeting 75% in the first three years.

ARC Investments, which was co-founded by mining tycoon Patrice Motsepe, was listed on the JSE on 7 September 2017 at R8.50 per share.

There was so much excitement around the new listing that the company offered an additional 35 million shares to satisfy demand. The gross proceeds increased from R1.9 billion to R2.2 billion.

Shareholders were keen to benefit from ARC Investments’ promise to give “public shareholders long-term capital appreciation by enabling them to invest in a permanently broad-based Black-controlled investment entity with a diversified indirectly held underlying portfolio of investments”.

To date, there has not been much capital appreciation. ARC investments’ share price plummeted from R8.50 in September 2017 to R2.10 when the lockdown hit.

Over the last two years, the share price rallied to over R6.00 per share, but it is still a long way off from the listing price.

Considering the poor share price performance, it is hardly surprising that there was strong resistance against ARC Investments’ plan, announced in September 2020, to raise R750 million in a share issue.

The company told shareholders that R205 million of the R750 million in proceeds would be used to settle “the outstanding fund management fee”.

There was such a backlash that ARC Investments backtracked within days, saying it would settle the fund management fee from internal cash resources.

Since then, the market has viewed the investment firm more favourably, as shown in the share price chart below.

A look at ARC Investments’ financials

ARC Investments have two important indicators of performance – intrinsic net asset value (INAV) and intrinsic portfolio value (IPV).

The IPV is the value of their invested assets, whereas the NAV is their IPV plus cash and other assets.

On 31 December 2021, ARC Investments had a net asset value of R13.58 billion, which translates to a net asset value per share of R10.31.

On 15 July 2022, ARC Investments’ share price closed at R6.20 per share. It means the share trades at a significant discount relative to its NAV.

There are good reasons for this discount.

30% of the company’s NAV is in a fair value reserve. These are unrealised gains recorded in the financial statements from fair value adjustments on ARCI’s investment companies.

In simple terms, when a valuation indicates a company is worth more than its recorded value, an upward adjustment is made to its value and is recorded in the fair value reserve.

ARC investments’ net profit is also primarily a result of fair value gains.

ARC investments’ R1.6 billion net profit in its latest financial results, for example, was solely generated from a R1.9 billion fair value gain from investment companies held.

A challenge for investors is that most of ARCI’s investments are non-listed entities, and the firm does not disclose in-depth financial and operational data for these investments.

The data used for valuing these investments, which contribute significantly to ARCI’s NAV, are not publicly available.

A good example is Rain, which contributes 24% of the ARCI fund and is its main asset in the telecoms sector.

To date, ARCI has not disclosed any detailed financial or operational information about Rain, which has raised questions about its valuation.

It may be a big reason for the discount on ARC investments’ share price.

Investors cannot confirm the fair value adjustments made by ARCI as they do not have access to the investment subsidiaries’ financials.

It can cause investors to be wary since the fair value gains almost exclusively determine ARCI’s net profits. Uncertainty around these figures will have an impact on their share price.