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.
Read also: Peregrine shows healthy rise in half-year profit
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.”
‘Focusing business’
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.”