If share prices were based on the cool factor of company branding, Altvest would already be one of the most valuable companies on the JSE. Alas, investors tend to care more about performance than exciting billboards that dish up the nostalgia of old-school comic books. In case you need final proof of this, just refer to the Berkshire Hathaway website. The most powerful investment holding company in the world has a website that looks as if someone built it in DOS.
Of course, Altvest is putting itself out there as a disruptor. It therefore needs to look and feel completely different from everything else so that it can grab enough attention in the market. There are lots of empowering images on the website, with cartoon rockets and evocative language like “Let’s own the economy” and “Help me raise capital” — the kind of stuff that speaks directly to a new generation of investors and basically every entrepreneur out there.
This means that Altvest’s brand will find the strongest resonance with young investors, which in turn means there is a fundamental problem baked into the unit economics of the business: the cost of acquiring a customer (in this case an investor) is high relative to the benefit the investor brings.
As Altvest is essentially a platform business at heart that hopes to connect capital to opportunities, it becomes critical for it to find sufficient capital to allow it to achieve scale within a reasonable time. Subscale platforms inevitably wither away, eaten up by fixed costs. Many a start-up has fallen into this trap, especially in South Africa, where there isn’t a deep pool of venture capital willing to keep putting money behind dreams rather than execution.
The principle behind Altvest is that the ordinary shares reference the growth of Altvest Capital overall, as well as its carried interest in the various underlying investments, while the various classes of preferred ordinary shares relate to specific assets.
Will this disruptive approach work? The first of many challenges being faced by Altvest is that the target investor market is anything but cash flush. Gen Z are still figuring out how to move out and pay the rent, while millennials are wondering how anyone can afford to have children. Most people are only starting to build a balance sheet in their 40s. I’m not convinced that this age group wants to read stuff like “Become a shareholder in your favourite sports team” or “Disrupting the game”. They want to hear about how they won’t lose their hard-earned money as they work towards retirement.
There are three classes of preference shares in issue. The A shares reference Umganu Lodge, Altvest’s first investment that is located on the Sabie River. Altvest acquired a 50% stake for R15m, so you can already see the crowdfunding flavour coming through here in terms of the size of the asset. Another example is Bambanani Family Group, the underlying asset for the B shares. This is a family-focused restaurant that started in Melville, with plans to expand. Again, at such an early stage in the restaurant’s journey, we find ourselves looking at a venture capital-style risk.
The third class of preference shares is perhaps the most interesting one, referencing the Altvest Credit Opportunities Fund. This is a lending operation focused on businesses with a strong slant towards women in their ownership or management. This immediately sounds as if it has an impact finance flavour rather than a pure profit motive, so take that into account. Any nonfinancial metrics that sway the lending criteria in a particular direction, regardless of whether you love the thought or not, tend to affect returns. This is because the total opportunity set isn’t as large as would otherwise be the case.
The Altvest prospectus says BDO valued this fund for purposes of the capital raise and that a cost of equity of 23.8% was used. This gives you an idea of the underlying risks here: this is firmly private equity land.
If you look through all the fancy marketing and some of the ill-advised previous communication strategies of the group, you find a structure that is genuinely unique in the South African market. The intention is to democratise private equity and even venture capital investing, allowing business owners to seek capital by working through the Altvest structure.
At heart, the concept speaks to exactly how we all wished capital markets would work. Still, there are good reasons it hasn’t been done before, ranging from risk and liquidity to the points raised above regarding the age of the investor this will really appeal to.
The recently announced results show just how difficult it will be. The FM is less concerned about the R6.2m loss in Altvest Capital, as that it is incredibly subscale at the moment given the need to roll out more investments. The results of the Altvest Credit Opportunities Fund are a bigger concern, with credit loss allowances of nearly R9m on a book that could generate only R2m in profit after interest expenses and before overheads. Things need to change there ... and quickly.
As Altvest is essentially a platform business at heart that hopes to connect capital to opportunities, it becomes critical for it to find sufficient capital to allow it to achieve scale within a reasonable time
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