Peregrine rings in the changes
CEO Rob Katz says emphasis at the refocused, streamlined group will be on wealth and asset management
A year after taking over from Jonathan Hertz, CEO Rob Katz has substantially changed the shape of the Peregrine Group.
If the competition authorities don’t object he will sell the group’s 65% interest in Peregrine Securities to a consortium of securities management and black empowerment companies.
Katz says the securities business does not fit with the new Peregrine model of a streamlined, low-capital, high-annuity business.
But it is a step forward in the transformation of SA. Fatima Vawda, one of the early employees of Peregrine who left to start Legae Securities, is leading the consortium to take over her old shop, and merge the two under the name Legae Peresec. And it will be a substantial business, as Peregrine Securities alone, even without a traditional sell-side equity research team, is the biggest equity trader by value and volume.
The business is even more entrenched in the derivatives market.
But its earnings are volatile — they fell 23% in the year to March — and the business is capital intensive. Peregrine Holdings had to plough in R250m during the year.
The trading margins were hit by the increased popularity of high-frequency trading, which comes with tiny fees, as well as the decline in the hedge fund industry, where Peregrine has a large share of the prime broking business. In spite of this, group headline earnings were up 7% to R535m.
The securities sale comes less than a year after Peregrine unbundled R1.9bn of proprietary investments into the new Sandown Capital: it no longer owns any direct holding in the Peregrine Capital hedge funds, though management still have their personal investments.
It has also exited property investment by unbundling its Stenprop shares.
Sandown is run by former Peregrine CEO Sean Melnick. His style is well-suited to turning a mixed bag of assets into something that seems valuable.
Peregrine still has an indirect interest in property through Java Capital, which sponsors most of the property companies on the JSE. Because of a more subdued property listing market, Java’s earnings fell 4% to R38m, less than 10% of the total.
Katz says he is very happy to see Java remain part of the group, as it is a good cash generator with low capital requirements, but he is not planning to increase the exposure to advisory businesses.
The focus of the new Peregrine will be on wealth and asset management. Katz says that he would like to bulk up Citadel even further by acquiring other like-minded financial planning businesses.
Citadel accounts for almost half of group earnings, and they were up 19% in the year to R207m. It had inflows of R4.9bn during the year but because a large part of its assets are dollar-denominated, assets were down about R1bn to R44bn on a weaker dollar overall.
Performance fees, often a driver of returns, fell more than half and now account for less than 3% of fees. Citadel strengthened its investment offering by acquiring 30% of boutique manager Electus, run by veteran money managers Neil Brown and Richard Hasson, which will now run a large portion of its funds.
The asset management cluster, predominantly Peregrine Capital, also grew earnings by 9% even though its assets were down year-on-year by 10% to R7.4bn. Its fixed fees were steady but its performance fees were up almost a quarter. If the decline of SA hedge funds continues it will hit this business.
The third pillar of the new Peregrine is UK-based Stenham, which fits well with Citadel as most of its clients are private clients or family offices. It has moved away from general funds of hedge funds, which investors are deserting, into more specialised funds such as health care and global macro. It also has a stable Channel Islands trust business that last year accounted for about half of the annuity income.
Foreigners now own about 12% of Peregrine, which has a good spread of investors: the Public Investment Corp, Old Mutual, Allan Gray and Prudential all own at least 9% of the equity. Higher annuity earnings have certainly attracted investors. Like Investec a generation ago, many have viewed Peregrine as something of a wheeler-dealer but the earnings are good quality and annuity income now accounts for 77% of earnings. The new Peregrine promises to be a solid dividend payer.