Reinet is not such a dog after all

Shares in Reinet, the investment company controlled and chaired by Johann Rupert, have jumped 35% over a year. That’s the sort of move not usually associated with an enterprise steeped in defensive capital preservation strategies. It’s also, arguably, about time. 

Investors might look hard into Reinet’s latest financials to glean reasons for such a swing in sentiment. There is the commitment by Reinet to invest the equivalent of 5% of its value into a specialised technology fund that may add a certain edge to the portfolio. Then there’s the maiden dividend paid by UK risk transfer specialist Pension Insurance Corp (PensCorp), now Reinet’s biggest asset.

But the most obvious reason of all is Reinet’s status as a rand hedge heavyweight.

Charles Boles, founder of Titanium Capital Partners, says Reinet’s defensive attributes and asset diversification are appealing at this critical juncture. “If you are looking for a portfolio of hard currency assets managed by someone unlikely to do something reckless, then Reinet ticks that box. You get this at what is still a compelling discount [to NAV] — though you are not going to get the next Tencent or Capitec.”

If you are looking for a portfolio of hard currency assets managed by someone unlikely to do something reckless, then Reinet ticks that box

—  Charles Boles 

That said, the FM has previously noted Reinet’s €34m investment in two funds managed by Coatue Management LLC, a global investment firm focused on technology opportunities. Coatue, which manages assets of $42bn, is headed by founder and fund manager Philippe Laffont. In a recent Financial Times interview he disarmingly described himself as “a repressed mediocre computer scientist”.

It appears Reinet’s initial €34m has been increased to €50m in the past six months. Reinet shareholders may hope Coatue’s performance will be neither repressed nor mediocre, because Reinet’s full commitment to two of its funds is a chunky €278m. So far, this is the boldest move yet by Reinet on its private equity fund commitments — which now top €1.1bn, or almost 20% of the portfolio value.

There’s not an abundance of detail on the Coatue venture. The commitment is split, with €139m (or $150m) earmarked for the Coatue Structured Offshore Feeder Fund and the same amount for the Coatue Tactical Solutions CT Offshore Fund. Reinet says both funds follow the same investment strategy.

In short, the funds are targeting late-stage growth companies while the IPO market for tech companies remains fizzled — providing funding flexibility that could include M&A activity.

Rupert says the Coatue funds will invest in structured investments in listed as well as privately held technology companies that “offer downside protection, while retaining upside potential”.

More intriguingly, he says: “Coatue will seek to employ a strategy that will opportunistically fund both offensive and defensive transactions such as M&A, and establish paths towards accelerating organic growth.” Rupert reckons there is a substantial universe of potential investment opportunities for Coatue. “Coatue will typically seek to lead transactions and assert control over deal structure, terms and price.”

Arguably, the Coatue venture may be less a technology thrust and more a special opportunities play. In the nine months since launching, the Coatue structured fund has mobilised $600m in eight deals. One of the most widely reported was the $150m structured finance deal with US corporate travel and expense company TripActions.

It’s taken only 15 years (since listing), but Reinet’s commitment to Coatue suggests it might finally be shaping up as a well-diversified and better-balanced portfolio that offers defensive as well as growth attributes.

In fact, Reinet’s portfolio makeup has arguably never looked better balanced. 

Its legacy holding in British American Tobacco (BAT) — which at times represented more than 85% of Reinet’s intrinsic value in the early years after the 2008 listing — now represents just 27% of reported NAV. Yet BAT has delivered: the original investment in BAT when Reinet was formed 15 years ago was valued at about €1.74bn. To date, almost €3.3bn has been cashed out in share sales — meaning that with the remaining holding of 2.16%, or €1.56bn, BAT’s total realised and unrealised value is over €4.8bn.

And though they’ve fallen in overall contribution, dividends from BAT in the year to end-March still topped €122m, or about 44% of the total Coatue commitments. Reinet’s 49.5% stake in PensCorp now looms largest, and at €2.8bn represents 48.7% of NAV. 

Cynics might say three-quarters of Reinet’s portfolio value still sits with just two assets. However, that’s significantly lower than the 87% both assets represented five years ago.

Anchor Capital global fund manager Peter Little believes that based on Reinet’s cash commitments to private equity funds, and the lack of operational cash being generated, it is likely that the group will need to continue to sell down its BAT shares. Little already believes “the days of trading it as a discounted entry point to BAT are long gone”.

Investors should keep an eye on Reinet’s private equity ventures. And the jury has long been out on whether Reinet should be investing in other funds rather than, for example, industrial or mining companies.

Despite the Rupert family’s penchant for broader technological advances (Remgro being an early investor in Vodacom and now a major player in fibre optics), Reinet has not made huge moves in the sector — yet. Existing (and small) investments in listed counters Grab Holdings and Twist Biosciences have been underwhelming.

Boles says the private equity segments are difficult to value and get heavily discounted by the market. “Then there are the fee structures with the private equity managers, which seem to add layers of cost … which investors don’t like.”

Based on current investment commitments of €620m, and assuming steady growth in PensCorp and no growth in BAT, the private equity portfolio value could stretch to represent as much as a quarter to a third of Reinet’s NAV in the short term.

Whether that narrows or widens the discount will depend not only on performance, but more detail being provided on the various funds. The current discount to NAV, by the FM’s calculation, is about 32%. That’s still wide, but better than the more than 40% levels that have been seen in recent years.

While investment trends in the technology sector are still difficult to discern, the opportunistic Coatue funds might be the key to finally changing investor perception.