Diversified investment holding companies have always loomed large in the portfolio of Hasenvest Alternative Capital Knowledge (HACK), an unreliable and unfashionable private investment vehicle that has routinely swerved away from Affluent Avenue.
My rationale is simple: investment counters mostly offer access to a portfolio of quality underlying and cash-generative assets, but unlike unit trusts or ETFs, the buy-in is usually at a discount to intrinsic NAV. I’d say that for the most part this has been a satisfactory strategy and I have no reason to complain about various dalliances in my favourites: Sabvest Capital*, Hosken Consolidated Investments and Remgro.
There have been (many) others that were less satisfactory — especially those smaller investment companies where directors’ valuations were, with the benefit of hindsight, rightly treated with much scepticism by the market. Value unlocking, in these cases, was painful and ponderous. I now hold only Reinet Investments, but it represents more than a third of my humble equity portfolio, which these days is tilting heavily towards ETFs rather than strategic stock picks (read into that what you will).
About a month ago I would have regarded Reinet — after selling off its two largest investments — as a low-risk cornerstone position, with almost no chance of downside. Yet the share is down close to 20% over a month — and that’s only because a commitment to share buybacks has bumped the price off its recent 12-month low of R452. The correction in the share price stems largely from Reinet initially giving little indication of what it intended with its €5.5bn cash heap. While the majority of shareholders were clearly hopeful of a special dividend, a reticent Reinet preferred the flexibility of retaining a large cash pile.
At the end of last week — three weeks since the release of the financial results to end March — Reinet gave further notice on the contentious cash pile. It was a rather curious communiqué, which only slightly placated disgruntled shareholders. At the outset, Reinet justified its scant communication with shareholders (more than a few larger ones have been corresponding frantically with the group in the past few weeks). Reinet indicated that it had been investigating “a potentially very significant investment opportunity”. As a result, it considered itself to be in a “closed period”, meaning the group could not communicate with individual shareholders or restart its share buyback programme. But Reinet advised that the investment opportunity “will not be pursued in the immediate future, resulting in the closed period being lifted”.
I am wary of underestimating Reinet’s prime mover: Johann Rupert
I’m not sure how close Reinet came to following through on this “very significant investment opportunity”, but tellingly, no cautionary notice was ever issued. In any event, Reinet is now free to restart the share buyback programme. That’s a good thing because it is trading at a discount of roughly 10% to its cash holding, with the remaining portfolio investments — worth €1.27bn at last count — pretty much dismissed. Reinet can now buy back shares at market value for an aggregate maximum amount of €500m, and to a maximum of 16.5-million shares, until next year’s AGM in August.
That’s prudent capital allocation, considering the discount offered on Reinet’s scrip, but at full execution it represents less than 10% of the cash pile. Existing unfunded investment commitments will account for a further €565m, and then there is the €132m in management and performance fees to be settled, as well as the latest dividend. There is, barring any significant and sudden new investments, more than €4bn in unencumbered cash on Reinet’s balance sheet.
Would Reinet need all this cash if it did revisit the “very significant investment opportunity”? Is there (he asks hopefully) a chance that by the time the AGM rolls around next month, a meaningful special dividend could be proposed? Might it not be more appropriate — and this is just me thinking out loud — for Reinet to hold a cash balance more or less equal to its remaining portfolio of positions in other specialist investment vehicles? That way, Reinet could consider a handful of medium-sized new investments able to move the needle without incurring too much risk.
A blunter argument is that Reinet has been a mediocre allocator of capital over the long term, with dismal returns compared with most relevant measures in the markets. Shareholders, I suspect, would prefer receiving a chunk of change from Reinet to pursue other interests, or just to keep some powder dry for what has to be an inevitable market correction.
The counterargument, and one my dear wife postulated on the weekend, is to simply sell out of Reinet entirely, not look back in anger and move on to something less frustrating. But I just cannot get myself to effectively sell euros at a discount and would, should dividends from other positions roll in, be inclined to nibble away at Reinet at these levels. I am also wary of underestimating Reinet’s prime mover: Johann Rupert. I can’t help projecting a few years into the future and hearing Rupert booming: “You all thought we were stupid to hang on to all that cash. What do you say now?”
What I think will suffice as a goodwill dividend in the short term is a commitment by Reinet to open its AGM. In the past the meeting has been hosted in Luxembourg, but setting up remote participation for the many South African shareholders can’t be that difficult. A robust and frank engagement would go a long way towards easing tension between shareholders and the group’s custodians.
*Sabvest holds a 40% stake in Apex Partners, the majority shareholder in The Financial Mail Group
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