I’m mesmerised by the Public Investment Corporation’s (PIC) case against technology company AYO, currently playing out in the Western Cape High Court. This is an ongoing case, so it’s important to note that evidence is unfolding, and AYO has not yet put up its defence. But so far, it seems to me, the case hinges on an odd notion: is it illegal to make a really stupid investment? I mean, really, really stupid? After all, it’s not as though that hasn’t happened before in the history of investing.

It turns out it’s not that simple, of course. The uncontested facts are that the PIC pumped R4.3-billion into the company as part of its JSE listing for a 29% stake in AYO, implicitly valuing the company at R14.8-billion. So, what was the company earning at the time which would have justified that kind of investment? You would think, well, tech companies: good prospects, go ahead and value the thing pretty high, say at a 20 price/equity ratio. So that means you would expect the company’s earnings to be R740-million annually.

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Oddly enough, the pre-listing statement, dutifully prepared by PSG Corporate Finance and signed off by Grant Thornton, said the company was projecting in its 2018 financial year, the subsequent year, earnings of about that: R764,014,000 to be exact. So a P/E of around 18.

And what was it earning at the time? Well, we only found that out much, much later because — and this is a weirdly odd coincidence — the earnings prior to 2018 were not included in the pre-listing statement. But when the 2018 annual report came out, it turned out that the company’s turnover in 2017 was R478.7-million, and its after-tax profit was R27-million. I am not making this up. The PIC invested R4.3-billion in a company that was making R27-million a year.

Thumping dividends

And, as we now know, the R764-million profit that was supposed to materialise in 2018, well it never happened. In fact, there was a loss at the operational level. And there has been a loss every year since. But that, as we also know, hasn’t stopped AYO from declaring thumping dividends every year, so many that the PIC’s investment, now five years later, is more or less gone.

This is all very bad for the PIC because it now looks like a complete, total financial idiot, which is not good for an organisation charged with investing the retirement savings of the public service. Hence, the court case, in which it is essentially trying to clear its name. But I return to my opening question: is it really illegal to make a stupid investment?

Some weird stuff obviously happened for this investment to take place and that, essentially, is the PIC’s case. It is not arguing that it made a bad investment; it is arguing that it was deliberately misled by AYO and that its own procedures were flouted.

Just how badly they were flouted is becoming apparent, and it is an eye-opener. The opening witness was former PIC assistant portfolio manager Victor Seanie. Although he was only listed as an “assistant portfolio manager”, Seanie’s experience and training were and are extensive. He has dual honours in accounting and business administration and worked previously for PwC, Allan Gray and Kagiso Asset Management.

Dan Matjila

Seanie testified that he only saw the pre-listing statement the day before the deal was signed by the then CEO of the PIC, Dan Matjila, on 14 December 2017, just weeks before the listing. Normally, it would be his job to make a recommendation, but when he did read the statement he thought the subscription by the PIC was unlikely because the finances didn’t add up, so it would never go ahead.

But it did. By all accounts, Matjila just bulldozed it through. Seanie testified that the time it took was unusually short, his recommendation was critical of the transaction as proposed, and it was not procedural because the investment committee hadn’t approved it at the time Matjila agreed to the deal.

You have to feel for Seanie; he is proof — in case we needed it — that whenever wrongdoing happens, someone innocent gets hurt. In this case, it was him. After Matjila left, Seanie was summarily fired and my guess is that at this point, everybody was trying to cover his/her ass and find a scapegoat. The music stopped, and it was Seanie who got left without a chair.

AYO’s rebuttal in the court papers echoes my question. All of the statements in the pre-listing statement, including those from Thornton, were ringfenced — as they always are — with warnings that these are “anticipated” events, not guaranteed. They are projections, not promises. Furthermore, AYO says, the listing was duly signed off by the CEO of the organisation, and Lebogang Molebatsi, who was the acting executive head of listed investments, and that is what matters.

Implicitly, I think what they are arguing is that if the PIC didn’t follow its own procedures, well that’s something for the PIC to fix. It’s not their fault. Whether AYO misled the PIC is a trickier argument, but, as I mentioned, they didn’t claim any of their grandiose plans would happen, they just said they thought they might. Or something.

This is of course for the court to decide, but you have to ask: isn’t there a point at which the claims of future business success are so unlikely and so egregious, they constitute fraud? DM/BM