In a recent post, I touched on a concern that there was a flood of money going into “Section12J” and “Venture Capital” funds in South Africa and there may be a situation where there is too much capital chasing too few deals.
An announcement on the JSE Stock Exchange News Service (SENS) yesterday from Capital Appreciation, reinforces how hard it is, for investors to deploy capital into quality tech investments in the local market place.
Capital Appreciation listed in October 2015 as a “Special Purpose Acquisition Company” (SPAC) raising R1bn – of which R250m came from the Public Investment Corporation (PIC).
For those not familiar with a SPAC – they were a new investment vehicle which allowed an entity to raise capital on the JSE without having any operating businesses. The SPAC has a fixed amount of time to identify “viable assets”, or it has to give the money back to investors.
In February 2017, Capital Appreciation announced 3 deals purchasing stakes in Dashpay (for R225m in cash), Synthesis (R82.3m and 60m Capital Appreciation shares at 83c per share) and African Reasonance (R295m + 230m in Capital Appreciation shares at 83c per share) which operate in the FinTech and Software as a Service (Saas) space in SA.
However, a combination of the market being slow to get their heads around Capital Appreciation as a business and 290m in shares has seen the share price lag (Down 22% over the past year). In an attempt to get the share price up, the company announces it has bought-back 47m shares at between 62c and 79c per share. The company has paid R34m to buy-back shares, leaving Capital Appreciation with R560m in cash.
I’m a small minority shareholder in Capital Appreciation and I have been pleasantly surprised by the ability of the company to do chunky deals, generate profits and investment returns. I have a bit of a grumble about issuing shares for acquisitions when you are sitting on a lot of cash – why issue shares when you are going to then spend R34m buying them back on the market.
The business has plenty of cash: Based on a market capitalisation of just over R1bn, more than half the Capital Appreciation business valuation is cash right now.
I would use Capital Appreciation as a yardstick for investors to raise serious questions before jumping into these new Venture Capital and technology funds that are currently very popular in South Africa:
- Top deal-makers in the Capital Appreciation stable took 18 months to secure transactions – what will differentiate new technology funds to shorten the deal pipeline?
- After 2.5 years, Capital Appreciation still sits with more than half of its value in cash – what will differentiate VC management to actually deploy their capital to generate a return on capital?
- “Capital follows Yield” – if you believe the Capital Appreciation board are top investors then you’d have to argue that top investors see money-in-the-bank as a better investment case than chasing technology investments at stretched valuations. That gives you food for thought.
- Are you investing for a tax break or are you investing because you are bullish about the sector?
While I believe that the venture capital and technology sectors can be incredibly exciting in South Africa – and the 12J vehicles have stimulated some investment in this sector – investors should have a clear idea of what is happening in the sector. Capital Appreciation isn’t a “Venture Capital” vehicle, but it is part of the technology eco-system (potential buyer of high-growth businesses) and it tells an interesting story for investors.