The assets managed by the Public Investment Corporation (PIC) on behalf of the Government Employees Pension Fund (GEPF) and others were a not insignificant R2.08-trillion as of March 2018. The mandate is to generate returns and to contribute to the developmental goals of South Africa, for which it is entitled to earn a fee.

However, in many cases investments into listed and unlisted entities such as Steinhoff via the Lancaster Group, Edcon, MMI, Ascendis Health and the various entities owned or controlled by Iqbal Survé were found to have contravened the GEPF’s investment mandate and the PIC’s own investment processes, with great financial risk for the fund itself.

Report of the PIC Commission

The PIC report, which is a hefty 995 pages long and has been studied by the PIC board for the past month, reveals multiple instances where Dan Matjila, who was both CEO and CIO, and others within the PIC, exhibited a flagrant disregard for professional investing processes and a callous contempt for the pensioners on whose behalf they were investing. 

On more than one occasion Matjila reduced the size of a deal so that the investment decision would fall within his delegated authority and would not have to be referred to a higher committee or the board for consideration.

In many cases, these deals were on terms that were materially prejudicial to the PIC.

In the case of Lancaster, the PIC provided R9.4-billion of debt and equity financing to enable Lancaster, which is owned by the well-connected Jayendra Naidoo, to acquire 2.75% of Steinhoff. 

Aside from enriching one individual, there seems to be no real investment case for the PIC as it ended up acquiring, at great cost, shares in a company that it could have purchased directly on the market – and in which it already had a sizeable stake.

Also, the amount loaned was reduced from the amount requested, in order to fall under the R10-billion threshold, after which point the approval process becomes more onerous.

The report notes that this change in terms was at best “improper” and asks whether it’s possible that collusion could have taken place between Matjila and Naidoo. That question remains open-ended.

The commission also noted that the investment was housed in a special purpose vehicle called L101, in which the PIC acquired a stake. Yet it did not call in its own transaction advisers, deferring to the Lancaster advisers, despite the complexity of the structure and the deal.

This placed the PIC team at a very significant disadvantage.

There was also the small matter of a R114-million underwriting commission that Steinhoff paid to Lancaster at the time of the share acquisition. This is unusual and the report queries whether it should have been paid at all. If so, should it have been paid to Lancaster or the PIC, which actually funded the transaction?

The report recommends that the PIC obtains a legal opinion on this matter, and if necessary take steps to recover the money.

Of course, no one, not Lancaster nor the PIC foresaw the financial shenanigans that exploded into the public domain in December 2017, causing Steinhoff’s share price to implode.

But that does not change the fact that at the end of February 2019, the amount outstanding on this loan was about R11.6-billion with interest accrued.

And then, despite it already concluding a deal that had a limited upside, the PIC made a second investment through L101 to acquire shares in Star (Steinhoff Retail Africa), despite the fact that the terms of the loan and security package were diluted in favour of Lancaster.

This trend (of making multiple investments with a single counterparty) was visible with Maponya Matome Investment Holdings (MMI) where the PIC loaned a Mr Maponya R1.8-billion to make investments in Afgri, Daybreak, SA Homeloans and Magae Makhaya.

The total PIC exposure to a single investor amounted to R1.85-billion and with accrued interest to R2.2-billion.

“One could say the PIC was overexposed,” the report notes.

Of course, financing B-BBEE deals is a part of the PIC’s mandate, yet the report notes that in the case of the Lancaster deals the PIC did not adhere to its criteria for funding B-BBEE as the two transactions had the same single individual as a counterparty. 

The transaction also enabled the enrichment of a single individual, which does not fit with the concept of “broad-based” and does not comply with the mandate to facilitate B-BBEE given by the GEPF.

The report is scathing in this regard: 

“The reasons provided by Dr Matjila for his decision to invest in Steinhoff through Mr Naidoo reflect a disregard for the interests of the clients of the PIC… Given that Mr Naidoo is also a PEP (politically exposed person) the PIC was obliged to ensure a thorough due diligence was undertaken. Yet the PIC IC, and Dr Matjila, approved a transaction that would significantly enrich a single individual, and at the same time took decisions that removed the safeguards that were in place to protect the interests of the PIC.”

Similarly, the expression “fast and loose” with investors’ money comes to mind when reading the commission’s review on the investment into troubled retailer Edcon.

In this case, the issue is not the investment into Edcon itself, but the fees paid to the financial agents that facilitate these deals.

The PIC agreed to pay the advisers on this deal “a success fee in the amount of 1.5% of the total capital raised from the PIC” in an arrangement that “significantly disadvantages the PIC,” the report read.

The final invoice from the advisers came to R44.6-million.

That one of the advisers was Koketso Mabe of Keletso M Squared who was the former head of Private Equity and SIPS (structured investment products) at the PIC raises questions too. 

There are many, many more examples of malfeasance in the report, which will be unpacked over time.

In the meantime, the commission has made some practical recommendations. One of these is that the PIC’s board should institute a review of all contracts signed with advisers over the past five years to see if any contain similar or the same agreements.

And, more specifically, that the PIC review the Edcon transaction and determine whether the advisers earned their hefty fee.

As far as the Lancaster story goes, the commission recommends that the PIC amends its decision-making framework so that any amendments to proposals require the board’s approval, in particular those that reduce the necessary approvals to below board level. BM