By the end of its 2019 financial year, the Government Employees Pension Fund (GEPF), which is the biggest source of funds for the Public Investment Corporation (PIC), would have been hit with impairments of nearly R12-billion for its exposure to troubled retailer Steinhoff.

The GEPF, which is South Africa’s biggest pension fund, managing R1.8-trillion of funds belonging to 1.7 million current and retired state workers, has already written-off R4.27-billion for its 2018 financial year due to the collapse in Steinhoff’s share price.

With the Steinhoff shares collapsing by more than 80% since the furniture retailer admitted to accounting fraud in December 2017, which has left it scrambling for working capital, the GEPF might take another hit of about R7.3-billion during its 2019 financial year. This brings the cumulative losses since 2018 for the GEPF, which places most of the pension savings of state workers with the PIC, to about R11.57-billion.

This estimate is in line with the one provided by former PIC CEO Dan Matjila on July 18 at an inquiry looking at governance issues at the PIC. He believes the GEPF took an R11.6-billion hit from Steinhoff – meanwhile, the GEPF is yet to confirm this in its yet-to-be published 2019 annual report.

These estimated losses are linked to a loan extended by the PIC, using GEPF funds, to Lancaster Group, a Black Economic Empowerment investment vehicle, to buy Steinhoff shares. Lancaster Group is owned by Jayendra Naidoo, a businessman who was a trade unionist with links to Cosatu before and after South Africa’s transition to a constitutional democracy in 1994.

The PIC lent R9.35-billion to a Lancaster vehicle, called Lancaster 101, in September 2016 to buy 2.75% of Steinhoff’s ordinary shares. At the time, Steinhoff, led by the disgraced Markus Jooste, was a high-flying retailer and a market darling as its shares traded in a narrow range of about R76 to R85 a share. Lately, Steinhoff, which has a €6.5-billion (about R111-billion) hole in its accounts due to fraud uncovered from its 2009 financial year to 2017 is a penny stock worth R1.25 on Wednesday 14 August.

Benefits to PIC

Testifying at the PIC inquiry on Wednesday 14 August, Naidoo said in exchange for the loan, the PIC took a 50% shareholding in Lancaster 101 while the remaining 50% would be equally held by Naidoo’s Lancaster Group and the group’s community development trust.

It was an arrangement that was beneficial for the PIC.

The state asset manager, through its investment in Lancaster 101, would increase its shareholding in Steinhoff to a point where it could influence Steinhoff’s strategic direction and have a say in corporate governance issues. To do this, the PIC had a board representative at the retailer. And Naidoo became a Steinhoff director to act as “a point of interest to the PIC” – equivalent to a friend for the state asset manager.

Matjila confirmed that the Lancaster 101 loan would be impaired/written-off by R11.6-billion, which includes the original loan of R9.35-billion plus interest as at March 2019. Naidoo didn’t dispute this impairment figure.

There could still be value left in the PIC loan (effectively GEPF funds), as Steinhoff shares have not lost all their value. The loan could be recovered as Lancaster Group is suing Steinhoff for R12-billion, including accrued interest, for misrepresentations to its financial statements. This process might take a while to finalise as Steinhoff is facing several lawsuits from shareholders based in Frankfurt, where it has a primary listing, and South Africa. They also want recompense.

Relinquishing PIC protection from Steinhoff

Naidoo conceded that losses to GEPF’s loan linked to Steinhoff could have been minimised if a derivative insurance structure, which protected the PIC against a collapse in the value of the retailer’s shares, had not been removed.

This derivative insurance structure was removed when Naidoo, through Lancaster Group, acquired shares in Steinhoff Africa Retail (Star) when it listed on the JSE in September 2017. Star, now known as Pepkor Holdings, was an entity that housed Steinhoff’s African retail assets – but it was financially independent of the retailer.

The derivative insurance structure was sold to Citibank in return for a R6.3-billion loan for Lancaster to buy Star shares, according to Matjila. And the PIC participated in negotiations and agreed to sell its protective structure to help Lancaster raise funding from Citibank.

Naidoo said it made “perfect sense” to relinquish the PIC’s derivative structure protection at the time.

“The PIC didn’t have to spend any money to get exposure to true assets such as Steinhoff and Star. If all things were equal, every model that was done showed how beneficial this [selling the protection structure] would be because the cost of the [loan] funding was trading lower in commercial terms,” he said.

However, in hindsight and after the fraud at Steinhoff was unveiled, Naidoo admitted that the PIC made a huge sacrifice.

“If we had an ability to see into the fraud, we would have valued the protection more highly and the PIC would regard it more highly.” BM