Johannesburg - Peregrine Holdings, the operator of South Africa’s oldest hedge fund, is considering a plan to split the company by using profits from its stockbroking and wealth-management units to create a new investment firm. The stock surged the most in a year.
The company, which also owns half of advisory business Java Capital, has about R1.5 billion of surplus cash on its balance sheet that could be used to start the venture, CEO Jonathan Hertz, 44, said in an interview at Bloomberg’s Johannesburg office. The board still has to make a final decision and the proposal is one of the options it’s looking at, he said.
“The accumulated profit that Peregrine earned over the years and hasn’t been paid out as dividends has become substantial and materially exceeds the assets that are needed to run the business,” he said this week. The company is now “seriously considering whether to return the excess money to shareholders either directly or in the form of an investment vehicle given to shareholders that they can own.”
Peregrine, which had R105 billion under management as of September 30, is seeking ways to divorce the balance sheet of the parent company from its operating units. Having a separate operating business will make it easier to value the company because it will avoid some of the volatility to earnings that comes with investing excess funds in capital markets. The surplus comprises about R600 million invested in hedge funds, including Peregrine Capital, R350 million from Channel Islands-based Stenham, as well as other sundry investments.
The company’s share price surged as much as 6.7 percent, the most in more than a year on an intraday basis. The stock pared gains to trade 3.9 percent up at R27.75 as of 9:41 a.m. in Johannesburg, giving Peregrine a market value of R6.25 billion.
“One of the problems Peregrine has is that it has quite a big balance sheet relative to its size,” Hertz said. “You invest your money in things that go up and go down so your earnings don’t have a smooth road. There’s quite a bit of work being done to explore a restructuring of the business, splitting out the balance sheet from the rest.”
Should the board decide to separate the excess capital from the company’s divisions, the operating business would likely pay out almost all of its profit, less any required working capital increases, in dividends, he said. The new investment vehicle envisaged in the proposal would be able to take on additional capital, hold about half of its assets offshore and possibly trade at a discount to its net asset value, Hertz said.
“It’s a focusing of the business,” he said.
The shakeup comes as Hertz gets ready to step down as CEO at the end of June to devote more time to Alpha Capital Management, a Bermuda-based investment-management business he started in 2008. A split would make it easier for the new person to run the operations, he said, adding that there are several potential candidates vying for the post.
The stock has more than tripled since he took the post in April 2013, exceeding the 49 percent gain of the FTSE/JSE Africa All Share Index.
“This business makes R600 million to R700 rand of cash a year but actually one of the more complex decisions is deciding what to do with the cash,” Hertz said. “To be in a listed environment is quite a tough situation. And when you’ve got complexities in your business and when people can’t value it easily, it’s exacerbated the problem.”