A short research note on Ethos Capital (JSE Listed) A listed (liquid) Private Equity Play Prepared by Korner Perspective (FSP no 42387)

Transcription

1 A short research note on Ethos Capital (JSE Listed) A listed (liquid) Private Equity Play Prepared by Korner Perspective (FSP no 42387)

2 What is Ethos Capital A listed Private Equity (share code EPE) play Listed in Aug Capital raised +- R 1.8 bn. Invests in a variety of private equity (PE) assets, namely: New Ethos funds (e.g. Fund 7) As an anchor investor in new niche PE funds (e.g. Mid tier or mezzanine fund) Existing Ethos Funds (as a buyer of funds at a discount with a short horizon) Direct assets (e.g. as co-investor or buying of recycled PE assets) Gives access to the skills, network of Ethos Private Equity Generally long term Private Equity, but with added flexibility

3 About Ethos Private Equity In business since 1984 (33 years) Have made 104 acquisitions since 1984 of which 94 have been successfully realised In Sept 2017 partnered with RMI and Royal Investment Managers in which: RMI & RIM investing in Ethos (funds and Ethos) 30% of ethos held by RMI and RIM, resulting in Ethos being 25% BEE owned Access to RMI distribution network Current fund Ethos Fund VI. Is R8.6bn in commitments Great historic returns (well over 20%) Funds well diversified and conservatively valued Generally seen as the most successful traditional PE player in SA Active involvement in investments (not just leveraged PE)

4 Investment hypothesis Ethos Capital Gives opportunity to invest in Pure Private Equity (PE) Private equity is effectively great alternative asset class Good PE is a great alternative to overvalued and tired JSE Lots of opportunities in the Private equity space. Many businesses Great pedigree of team Well diversified across funds and direct assets should reduce return volatility (we are looking for IRR of 15%+) Initially underpinned by big cash holding (cash is +- 60% of NAV) We are in good company

5 The Ethos Capital Portfolio at Sept 2017

6 High Level NAV (at end Sept 2017) NAV Cash (now) R 6.23 Invested R 4.14 Share price R 8.60 R per share This means you buy the portfolio at 17% discount OR Cash is neutral and you get the Private equity assets at 50% discount Significant increase in investments from 30 june 17 to Sept 17

7 Ethos Capital Portfolio composition (proforma is at end September) Significant increase in invested capital from 30 june 17 (1.82 p.s.) to 30 Sept 17 (R4.14 p.s.)

8 Current invested portfolio (40% of NAV)

9 Ethos Capital NAV split at Sept 2017 Twinsaver 4% Autozone 5% Eazi Access 4% MTN Zakele 3% Smaller 2% Primedia 11% Kevro 11% Cash 60% Cash represents 72% of share price NAV is both direct and via funds

10 Performance of underlying investments Underlying portfolio revenue growth is 9% Underlying EBITDA growth is 10% (tough environment) Proforma valuation ( EV/ EBITDA) was 6.6 times Gearing in investments is low ( Net debt / EBITDA) at 2.3 times

11 Conservative valuations are key to a realistic NAV Ethos average EBITDA valuation is a sensible 6.6x

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13 What do we expect? We believe that the PE assets should produce 15% p.a. over time (well below historic IRR but realistic) We think that the NAV will appreciate fairly consistently given steady deployment and diversification We expect the discount to NAV (currently 17%) to narrow and even swing into a premium over time The 15% on the PE PLUS the discount reversal could given returns on 5 year view of 20%

14 50 Ethos Possible Price Action on long term (assuming NAV grows at 15% p.a.) Ethos Capital could actually trade at an NAV Premium over time (e.g. for liquidity) NAV Theoretical Price

15 The register is tightening up don t wait for the weak holders to be done At listing As at 30 September % 11% 9% 6% 12% 15% 58% 3% 1% 3% 68% 6% Institutional long only Institutional hedge funds HNW Institutional HNW Retail investors Ethos related Institutional long only Institutional hedge funds HNW Institutional HNW Retail investors Ethos related

16 Final thoughts ONLY CONSIDER ETHOS CAPITAL (JSE LISTED) IF YOU: 1. Like Private Equity or want an alternative to traditional assets 2. Back the Ethos Private Equity team 3. Understand that PE can produce volatile returns (at times) i.e. have a fairly high risk tolerance 4. Have a long term investment horizon (minimum 5 years) 5. Are patient (for returns), and 6. Don t need dividends

17 Disclaimer This information is provided for information purposes only This note is not intended as an inducement to do business with the reader This research note should not be seen as constituting investment advice or a specific recommendation. It is rather an opinion based on the views and expectations of the writer. The reader should seek professional advice or do their own research, so as to form an investment opinion This note contains forward looking statements, which should be seen as forecasts and subject to significant forecast errors This note is however produced in good faith, with the objective of making the reader aware of this opportunity. The writer and its clients may hold investments in the company discussed