RMB Corvest sees buying opportunity in JSE delistings

The on-balance sheet private equity vehicle of Rand Merchant Bank says many JSE companies would be better off in the unlisted environment.

RMB Corvest, an on-balance sheet private equity vehicle of Rand Merchant Bank, sees the delistings dilemma plaguing the JSE as an opportunity to snap up assets it believes would be better off operating in an unlisted environment.

The FirstRand-owned private equity house, the sister company of RMB Ventures which targets slightly larger assets, says less mature entities in the JSE’s small to mid-cap space would benefit from partnering private investors for five to seven years before pursuing a listing.

RMB Corvest argues that partnering private investors could see many such businesses return to the JSE once they are better prepared for the regulatory oversight that comes with being listed as they would’ve had time to optimise their balance sheets and improve their finance and governance systems.

“The JSE plays a very pivotal role in SA’s financial markets so I am not trying to knock them but some companies should not be listed,” RMB Corvest CEO Mike Donaldson told Business Day. “Sophisticated alternatives like private equity would be better for a lot of businesses, especially those that are still in a growth phase. Partnering with a private equity firm can allow a company to clean up its balance sheet and grow its income statement over time until it’s more mature without having to worry about delivering earnings per share to shareholders that are often more focused on the short term.”

The JSE has suffered a spate of delistings in recent years that has seen companies ranging from PSG to smaller cap stocks such as  Anchor Capital and Pioneer Foods leave Africa’s largest bourse. While some of those delistings have been caused by M&A, critics have also cited the JSE’s onerous listings requirements as a driver.

PSG CEO Piet Mouton told Business Day in April that a JSE listing requires an “army of people” to ensure compliance with regulatory obligations that are more suited to developed markets. However, Donaldson says he believes too many SA companies seek a listing too soon before their corporate processes are sophisticated enough to deal with the scrutiny that comes with being listed on publicly traded markets.

“Often when companies go straight to a listing they don’t realise the complexity of it and the level of reporting that is required,” he says. “Quite often that doesn’t suit founders of businesses who aren’t prepared to have to answer to shareholders all the time and explain what they are doing.”

Donaldson says this creates opportunities for private equity firms to buy out shareholders of companies who feel the listed environment is not to their liking. For RMB Corvest the ideal target would be companies whose ebitda  (earnings before interest, taxes, depreciation and amortisation) is between R50m and R200m, which covers the bulk of the small to lower-mid cap sector of the JSE.

While RMB Corvest is “sector agnostic” meaning it can invest in anything, it favours companies with good assets that produce predictable cash flows in unfavoured sectors, which allows it to acquire assets at a good price. Companies that Donaldson says are ripe for a delisting are those trading at a JSE market capitalisation below their fair value with heavy industrials and services firms, particularly those supplying the mining and building materials sectors, named as ideal picks.

“Sometimes the market doesn’t give these companies their due credit,” he says. “If a company is rich in assets and produces good cash flow but is in an unfavoured sector we believe we can take it off market, fix up the balance sheet and still make a very good return over five to seven years.”

RMB Corvest’s cheque size is between R75m and R500m for minority stakes in businesses where the founders or management retain some equity and are prepared to remain invested for at least five to seven years. However, given that RMB Corvest’s sole funder is RMB, it doesn’t have the same exit pressures as typical private equity firms and can remain invested for longer than the usual five to seven year investment horizon.

For example, RMB Corvest has been invested in Fidelity Security for over 30 years. Its portfolio of 51 investee companies also includes JoJo tanks, the Fournos chain of bakeries, pharmaceutical group Brunel and a range of services and engineering businesses among others.

Having exited 150 investee companies since its inception for an average internal rate of return (IRR) of about 30%, RMB Corvest is on the hunt for new assets. That will enable it to maintain an average churn rate on its portfolio of between three and four purchases and sales a year, which is necessary to keep its returns ticking over.

As a firm powered by chartered accountants Donaldson says RMB Corvest’s preference is to maintain an arm’s length from operations and focus on investee companies’ financials. That way it can use its financial acumen and knowledge of the regulatory environment to professionalise its portfolio companies rather than get involved in their day to day operations.

“We don’t like to get operationally involved,” he says. “We want our partners to run the business and be completely entrenched with an equity stake. We don’t want them working for us as employees; we want them working with us.

This article, published on 8 April 2022, was authored by Business Day writer Garth Theunissen.