This year’s business newsmaker certainly did not hog the headlines. In fact, readers might be hard-pressed to find even a few column inches dedicated to the person.
But those who watch the surfeit of turnaround and deep-value stories that are scattered across the JSE will certainly know that 2024 was a watershed year for Sam Sithole and the investment business he heads, Value Capital Partners (VCP).
VCP was launched in 2016 as a specialist active investment outfit with the premise of “unlocking value as an engaged shareholder”. Scepticism, naturally, abounded.
Shareholder activism has not really taken hold in South Africa. Activist shareholders have been few and far between in recent years, and those that did take a tilt at various projects in the past, such as Active Value Partners and FRM Strategies, endured mixed results and were short-lived.
To make matters worse, the prime movers at VCP had only recently left private equity investment firm Brait, which had made a nifty turn by selling off its meaningful stake in fashion retailer Pepkor to Steinhoff International. The wheels would start coming off at Brait in 2017, when investments like UK-based fashion chain New Look started to unravel.
The fallout at Brait would, unfairly, cause ripples for the fledgling VCP — which did not exactly impress the market with its first low-key tilts at beleaguered counters such as technology conglomerate Altron, services group Adcorp and cement giant PPC, as well as out-of-fashion gaming groups Sun International and Grand Parade Investments.
Then there is the view that the broader philosophy of activist investment is inappropriate for South Africa and the JSE. One has to remember that the smattering of individual activist investors — take a bow, Theo Botha and Chris Logan — would garner almost no support from institutional investors, even if their concerns had merit or they presented logical value-unlocking proposals.
Activist shareholders, due to the “critical” nature of their engagements, can often ruffle feathers — badly. There have even been instances where activist efforts backfired because executive management doggedly doubled down on existing positions or strategies.
VCP seems to have taken a different tack. The engagements with target companies look constructive rather than acrimonious.
Sithole says the FM’s observations are absolutely right. “This was a deliberate decision by my co-founder, Antony Ball, and me when we started VCP in October 2016.”
There were several reasons for this approach, says Sithole. “The business culture in South Africa is very different from that in the US, where it’s mostly cut-throat and ruthless. Part of it is that South Africa is quite small. Each person you deal with is probably a fellow member at a country club or church, and you probably know their kids and wives. A more collegial and respectful relationship with top executives makes sense in South Africa, even when you have decided to part ways.”
He continues: “When there is infighting between management and the board, or among board members, there are invariably newspaper headlines, followed by a nose-dive in the share price. We strongly believe any differences must be resolved in confidence, otherwise there is serious destruction of shareholder value. Our primary focus is the protection of shareholder value, and it starts with the way conflict is resolved.”
Sithole says businesses do take after their founders and in most instances mirror their values and cultures. “I would like to believe that Antony and I are relational people and always put the relationship, and treating others the way we want to be treated, first. This is, of course, not always the case, especially where there are disagreements on the future direction of the business.
“But even in those instances, we tend to err on the generous side. We lean towards a process that retains a person’s reputation and dignity, rather than the opposite.” Sithole says Ball recently remarked at an investor conference that there is probably not one former CEO of any of the VCP portfolio companies who would not answer a phone call and have a cup of coffee with the team. “That’s quite an incredible statement, when some of these people had to exit their lifelong career positions.”
Sithole also stresses that VCP employs people who have great people skills and the character to build bridges with a board that initially would be quite hostile or suspicious. “It’s a mixture of art and science. But at its core it’s an ability to develop trust and constructive relationships at the highest level of the corporate world. There are very few individuals who are able to do this, and at VCP we have been blessed with some extraordinary investment directors and partners.”
Several VCP investments have paid off in the past year. Altron — where VCP had already unlocked significant value a few years ago by initiating the spinning-off of Bytes — has had its share price jump over 100% this year. Key operations like tracking group Netstar and the fintech hub gained encouraging traction. Consumer-focused investments Pepkor and Tiger Brands have also been robust this year, while private education group AdvTech has delivered a gain of more than 100% since VCP bought in three years ago.
It’s a mixture of art and science. But at its core it’s an ability to develop trust and constructive relationships
Even laggards like fintech hub Lesaka, PPC and Adcorp have found fortification this year — the latter doling out some generous dividends. Sun International, which sweated bullets through the Covid lockdowns, is on the front foot again, even if the share price gains were quite pedestrian in 2024. Over three years, Sun has had a 63% gain in its share price, and VCP is starting to collect decent dividend flows.
Automotive and battery group Metair remains the stark underperformer in the VCP portfolio. But changes are afoot, and there could be structural developments to spark sentiment in 2025.
The question, of course, is how VCP manages to be patient in addressing key changes that market watchers might feel are already long overdue.
Sithole explains that much of VCP’s “patient” work is done before it invests or takes a board position. “We probably spend between six and 24 months assessing a potential investment before we gain the conviction that we should invest.”
He says this is partly to ensure that VCP has enough margin of safety (or downside protection), because it manages a concentrated portfolio of between eight and a dozen positions at any one point.
Sithole says the assessment includes having contingency plans for bringing in new management should this be required.
He points out that VCP also prefers to test its thinking with other shareholders using publicly available information. “We try to avoid a fight between shareholders if we can. It can be very destructive to the business. Once we take a board seat, we try to move as quickly as possible, though we still concede that it takes a good 12 to 36 months to see the results of any transformational efforts.”
But is there ever a time that VCP has to reassess original goals and walk away from an investment?
Sithole notes: “Investing is probably the most humbling profession, and you will always have your fair share of duds and investments that don’t work. But this process, while unavoidable, is priceless, as you learn the most during your unsuccessful investments — about both your investment model and your people.”
VCP has been fortunate in that most of the pedestrian investments were made during its initial stages, when the group was still testing the model — “separating the theory from the practice on the ground”, Sithole says.
“What we do every month is to undertake a review of the portfolio, during which we compare each investment against original targets and assess potential upside vs our minimum target returns.” He says VCP has been fairly decisive in exiting the suboptimal investments, though he concedes that the constraint of being on a board, or sometimes being in illiquid investments, has delayed one or two of the exits.
After a cracking 2024, is there a temptation for VCP to cash out of any of its current positions?
This has something to do with human psychology. We tend to experience the pain of losses much more deeply than the joy of gains.
— Sam Sithole
Sithole says the conventional investment wisdom is that investors hold on to their losers for far too long, and sell the winners way too quickly.
“This has something to do with human psychology. We tend to experience the pain of losses much more deeply than the joy of gains. Fortunately, I think we have managed to stay the course for a few of our investments.”
He cites Altron, VCP’s first investment in December 2016 and still one of its key investments today. “By December 2020, we had created an internal rate of return of more than 50% and four to five times returns for our investors. But we still believed there was more juice left. I am glad we stayed the course, as Altron has just been the best-performing share in 2024.”
The way things have stacked up for VCP this year suggests 2025 could be another big year, with plenty of opportunities still abounding on the JSE. Would there perhaps be any merit in listing VCP as a specialist activist investment fund — which could, for one thing, provide a meaningful war chest via an IPO?
Sithole seems open-minded. “We are constantly looking at new fundraising efforts and have recently appointed our fellow partner Tapiwa Ngara to be in charge of this key strategic pillar. We won’t discount any ideas at this moment, as we need as much capital as we can raise.”
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