Peregrine gets set to go private
The JSE is losing another local small cap to private equity. But Peregrine investors can opt to stay in for the long haul
After more than 20 years on the JSE, wealth manager Peregrine Holdings is likely to be delisted from the exchange by September.
The predator is private equity firm Capitalworks, which has offered R21 a share to shareholders, valuing Peregrine at R4.5bn.
Peregrine CEO Rob Katz says the offer gives investors the opportunity to realise their investment in the company at a significant premium to its recent share price, while those who choose to retain their exposure will benefit from the support of Capitalworks as a key anchor shareholder.
The deal has been brewing since October and so far 37.8% of investors have given irrevocable undertakings to support the offer, which both an independent board as well as the Peregrine board recommended.
Peregrine’s imminent disappearance from the bourse is a uniquely telling indicator of just how unfriendly the local listed environment is. Peregrine, after all, trades the market through Peregrine Capital, and also helps other businesses list, through its half-owned unit Java Capital.
Capitalworks is one of the top five private equity firms in SA. It manages $1bn of assets, and is best known for grooming the Rhodes Food Group (now RFG Holdings) for listing.
Its larger holdings include chicken producer Sovereign Foods, anthracite miner Petmin and Much Asphalt.
Old Mutual Equities portfolio manager Tracy Brodziak says the jewel of the Peregrine business is Citadel, which now accounts for three-quarters of headline earnings.
"As a pre-eminent financial planner, it has a sticky client base. It is essential that Capitalworks retains the culture of the business, which is why it plans to lock in management through its share scheme," she says.
In its latest results, Citadel’s gross inflows increased by two-thirds in the year to March 31 2020 to R9.3bn, partly as it diversified from financial planning into direct asset management.
All its main portfolios are in the top quartile of their sector over three years and it was the only unit of Peregrine to improve earnings by 11% to R259m.
The other two main units of the business, Peregrine Capital and Java Capital, are already 50% owned by their own management.
Java is a corporate adviser, focused mainly on the listed property sector where there were very few listings. Unsurprisingly, its income was down 14.4%. to R13m.
Peregrine Capital, meanwhile, is the premier SA hedge fund house, rivalled only perhaps by 36One Asset Management. Its earnings were a third lower at R22.7m, owing to a combination of lower average assets and the inability to earn performance fees through absolute returns in the tough environment.
Peregrine is in the middle of disposing of its holding in Stenham, its offshore asset manager. Katz says it has already sold 50% of the business to Stenham management, and has undertaken to sell it the rest on its delisting. Even though it earns its income in sterling, Stenham’s profit fell 37.5% to R78.5m. Since Peregrine acquired control of Stenham in 2008, the margins in its core fund of hedge funds business have been squeezed and were offset only by the decline of the rand.
After Katz was appointed as CEO in August 2017, he soon followed a policy of extracting value.
Investments held at the centre such as Peregrine Capital funds were hived off into a separate listing initially called Sandown Capital, now Zarclear Holdings.
Katz also sold Peregrine Securities to an empowerment consortium headed by Legae Securities, in contrast to the more acquisitive approach of his predecessor Jonathan Hertz.
"I liked the [Peregrine] Securities business," says Hertz, speaking to the FM this week, "because it was the one business in the group that could benefit from clients and transactions in almost any other business: asset management in SA and abroad, hedge funds, bookbuilds done in the advisory sector and corporate finance."
Hertz was also responsible for buying into Java Capital, which printed money during the listed property boom.
Capitalworks has proposed a scheme of arrangement to implement the deal, with a general offer running alongside.
If the scheme of arrangement, which needs buy-in from 75% of shareholders, doesn’t become operative, the general offer will kick in.
Hertz points out that exiting shareholders are getting a multiple of more than 12 times earnings, a good offer in this market.
But, he argues, there’s reason to stay in too.
"Staff and shareholders remaining in the unlisted business are getting one of the great financial services businesses in SA in Citadel."
He believes those shareholders that choose to remain should ultimately be larger shareholders in a debt-free vehicle in four or five year’s time, once the cash generated by the group is used to pay off the debt.
"Their return on capital should be excellent and make up for five or so years of not earning a dividend."