Anger might be one reaction but that would be the wrong response. In truth, the main reaction should be one of relief. Relief because it should now focus the PIC’s attention on its remaining exposure to the Iqbal Survé stable which, if there is not urgent remedial action, will result in much bigger losses in the very near future.

The PIC is the manager of the GEPF’s savings, the largest single pool of savings in the country besides a number of other government mandated funds. The PIC manages the savings entrusted to it via four distinct funds:

• An equity fund, making it the largest investor on the JSE;

• A fixed-income fund, made up of largely government and SoE debt;

• A property fund; and

• the Isibaya fund, which invests or loans money to non-listed entities.

Overwhelmingly, the largest portion of the pool of savings is invested passively in the shares of companies listed on the JSE. One could think of it as an enormous tracker fund, not dissimilar to a unit trust. The PIC’s funds represent 12% of all the shares listed on the JSE. When the PIC reports its performance to its clients, it is really about how well most companies listed in the JSE have done. Some shares are down, or are delisted, while other shares go up. The reported result is the weighted aggregate of the performance of all the shares in the PIC portfolio. A similar arrangement applies to listed government and SoE debt on bond exchanges.

The other assets and debt are different. Because they are not listed, they don’t have an easily determinable value via share trades. Their value must be determined via accounting rules. So, for example, if a loan is being repaid on its terms, or even terms that are renegotiated, the full value of the loan remains on the books.

More complicated rules apply for the value of an unlisted share or debt instrument. There is a bit of discretion in all this but if a loan is not repaid on its terms, there needs to be an impairment of the loan which is like a write-off. The same applied if the value of a share is less than when it was acquired.

The takeover of Independent Newspapers by a Sekunjalo-led consortium in 2013, and funded primarily from the PIC and two Chinese government owned funds, was doomed from the start. Briefly, Independent Newspapers was acquired from its former owners, the Irish newspaper group under Tony O’Reilly which itself was in the process of going bankrupt.

O’Reilly had managed to acquire the then Argus Group, renamed Independent Newspapers over the period 1994-1999 (when it was delisted). O’Reilly turned out to be exactly the type of foreign investor South Africa should avoid. An excellent 2011 analysis done by the Media Workers Association of South Africa estimates that Independent Newspapers was acquired for between R560-million and R725-million but cumulative profits up to 2011 and available for repatriation to Ireland would have been in excess of R4-billion over that period. By the time Sekunjalo had got its hands on the company, it had been sucked dry by its Irish parent company.

Independent Newspapers had important titles but had suffered years of under-investment and profit extraction. Moreover, the decline of the whole newspaper sector via reduced circulation, online classifieds and sharply falling advertising revenues had begun to accelerate. But the time it was sold to the Sekunjalo-led consortium, the South African business had a then rand equivalent carrying value of R800-million. The acquisition using largely PIC sourced funds amounted to shoving another R1.2-billion down the throat of the near-bankrupt Irish parent.

R2-billion-odd repayable via loans and investor returns was never going to happen. Think about it: a five-year loan at 10% on R2-billion would have required Independent Newspapers to generate operational profits of over R42-million per month, every month. But just imagine, in a parallel universe, that Independent Newspapers could have soared and become a second Naspers. In that case, most of the upside would have been Sekunjalo’s and not the PIC’s (nor Chinese investors’) who risked almost all of the actual money invested into this transaction.

As we have seen, Iqbal Survé’s decidedly odd leadership of the group has just hastened the process where, today, Independent Newspapers is worth much less than nothing.

This raises obvious questions. How and why did this happen? Marianne Thamm sketches out the details of now permanently postponed litigation between the Guptas’ Oakbay and Sekunjalo about a background option agreement to have the Gupta company take over half of Sekunjalo’s share. Litigation didn’t resolve these issues, but it stinks.

Maybe one could take the very charitable view that losing a billion can be chalked up to experience and have it as a lesson for the future, but the GEPF exposure to Iqbal Survé’s schemes has grown and none of these schemes using government pensioners money will end well either.

Consider the case of AYO Technologies, the IT company controlled by various Survé entities. The details of this listing have been analysed and reported on by amaBhungane here (see AYO response) and here.

In short, the PIC invested R4.3-billion by buying AYO Technology shares at the time that it listed at the end of 2017 at R43/share, thereby acquiring a 29% stake in the company. At around the same time, AYO completed another transaction where a BEE entity acquired shares of the same class for R1.50. Besides a few bits and pieces, AYO Technologies’ value is all forward looking. It is about what it is going to do with the R4.3-billion. Nothing makes sense here and the recent disclosures of top AYO Technologies’ executives (now resigned) on unacceptable basic governance breaches are cause for real concern.

Let’s do a sanity check. The PIC’s R4.3-billion for 29% of the company suggests a value of R14.8-billion for the whole company at the point of the listing. This valuation is half of Telkom’s (which, with its Business Connexion unit, is around R30-billion). AYO Technologies’ shares now trade, if one can call it that, at around R25/share, suggesting a market cap of R8-billion. Have a look at the most recent financials some other listed technology firms listed in the same sector gives some context:

Even the mighty Datatec with turnover approaching R56-billion generated mostly off-shore in growing economies is “worth” less than AYO Technologies. Here is where the, ahem, the multisided platform, also known as the JSE, needs to reflect on its own role in all of this. The AYO shares simply do not trade. The supposed investors who Survé claims that the shares listed via the initial public offering are nowhere and there are not even shares available to short sell. With a minuscule number of shares trading, the buyer and seller, working in concert, can decide themselves how much an AYO share is worth. What a stock exchange is supposed to do is in its name – facilitate the exchange of stocks.

As long as the R4.3-billion remains on the AYO Technologies balance sheet, decisive action may mean that it could be recovered for the GEPF, but that is not happening. One of the main reasons for the AYO Technologies listing was to acquire 30% of British Telecom’s South African operations for about R1-billion. That would put a value of R3.3-billion on BT South Africa.

Let’s have a look at that:

The sting in the tail is that this stake is owned by AEEI, another listed company which itself is 61% owned by the Survé family trust, via Sekunjalo Investment Holdings. In AEEI’s own 2017 reporting, the combined Technology and Telecommunications division reported revenues of R618-million with operating profits of just R2.8-million. Assuming this is all accounted by BT South Africa, it is ludicrous to give it a valuation that is 10 times that of Jasco which itself is 20 times more profitable than AEEI’s Technology and Telecommunications assets were in 2017. Given that after the BT South Africa disposal, AEEI will not have any remaining technology/telecom assets, it is perfectly feasible that the proceeds from the disposal get distributed to shareholders. On this basis, Sekunjalo Investment Holdings has a cool R600-million coming its way. Sweet.

Survé may be awful at running businesses but he has picked up some valuable experience along the way. As long as he has the PIC in his pocket, his strategy now appears to make sure he keeps his operations in the listed sector. As an unlisted PIC/GEPF investment, there will always have to be an accounting for the failure at some point – as has occurred at Independent Newspapers. As a listed vehicle, you are just a very small part of the PIC’s overall listed asset base. If the PIC’s backing allows you to overpay for poorly performing assets that have no prospect of rendering any return, as was the case with Independent Newspapers, well then, why not insert yourself as the seller of these assets as is the case with the AYO/AEEI BT South Africa transaction?

If you think that the above analysis is uncharitable, consider the failed effort to list Sagarmatha. Fortunately, technical shortcomings in meeting the listing requirements saw that effort fall through but it seems almost unbelievable that it was mere technical shortcomings that prevented the listing. Sagarmatha’s pre-listing statement reads like a parody take of Silicon Valley mumbo jumbo, complete with the word “unicorn” that not even The Big Bang Theory television sitcom could sufficiently emulate. From what one can make out, its primary purpose was to acquire Independent Newspapers and affiliated assets, pay the one arm of the PIC holding this non-performing asset and dump them onto a listed vehicle – thereby preventing ever having to impair the investment.

The essayist and famous atheist, Christopher Hitchens, once gave himself the task of rewriting the 10 Commandments from the Old Testament for the modern age. Whether one is a believer, or an atheist, his version is worth considering. His seventh commandment reads:

Do not imagine that you can escape judgment if you rob people with a false prospectus rather than with a knife.

The biggest losses suffered by the GEPF in recent times has been in Steinhoff. Most passive funds took a knock as a result of this fraud (along with a number of international banks). In the PIC’s non-listed assets, a big write-off occurred via a loan to Steinhoff’s BEE investor but arguably, this exposure is not that different to its exposure to Steinhoff’s listed shares. The R1-billion loss in the Independent Media is the PIC’s alone and this write-off was bigger than the aggregate of all the PIC’s impairments in 2017.

President Cyril Ramaphosa’s commission of inquiry into the improprieties at the PIC cannot happen soon enough. Government employees and pensioners are owed an explanation as to how and why their savings have been repeatedly exposed to Survé-linked companies that make no sense whatsoever. The Trustees of the GEPF must now address obvious oversights in governance and accountability. To use a recently popular phrase, there needs to be consequence management. DM