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In this fascinating interview, 36One’s Jean Pierre Verster explains what made his hedge fund bold enough to “short” Abil – and bank R100m profit for clients as a result.
JAN PIERRE VERSTER: We at 36ONE have been the most vocal in our views on the African Bank, and we did back that up by putting our money where our mouths were, by shorting the stock. Some people even said, therefore we had a perverse incentive to see African Bank fail but I don’t think we take any pleasure in this because there are real world implications, people losing their jobs for instance but yes, we’ve done well for our clients. In our hedge fund, for instance – and we run the largest hedge fund in South Africa, more than R4bn as a single hedge fund, more than R8bn through all our hedge funds – we had between a one and two percent short in African Bank. That means we made 100 percent profit on that, and that comes to a round R100m, so it’s a nice number for our clients and we take performance fees off that number.
ALEC HOGG: Wow, R100m. Well, I suppose it is not quite George Soros breaking the Bank of England but in a South African context, I’m not sure anybody has had a bet of a similar nature, certainly in going short.
JAN PIERRE VERSTER: Possibly not seeing that we are the largest hedge fund, I can answer that we made some money or we hoped to make some money going along the debt as well. We bought some Swiss debt at around 45 cents on the Rand, which is now trading at 85 cents on the Rand, so that will help as well. Normally, hedge funds don’t disclose how much money they make, but just to give the context, I wanted to tell people that as you say, we can’t retire. It sounds like a lot but, in the context of our funds, it is one-percent, so we made more in the last two years on Naspers doing well than we did on African Bank failing. Once again, I don’t think anyone can look at the hedge funds as they sometimes did in the 2008 crisis and saying that ‘I was shorting of this stock caused or was anyway a reason for African Bank failing.’
ALEC HOGG: What did you see that others didn’t?
JAN PIERRE VERSTER: Look, it is easy to say in hindsight, so firstly, I think the facts were there for everyone to see. We did not (at 36ONE) have any access to facts that no one else did, so it probably comes down to what Michael Steinhardt, who’s a great hedge fund Manager, calls ‘variance perception’. We saw the same facts but we had a different perception. We had a different interpretation of those facts, and what I think we saw are pieces of a puzzle, which gave us some confidence in thinking that there could be a scenario where African Bank fails. As we saw, more pieces of that puzzle coming together, our conviction in that call became stronger. I can speak to a few pieces, if you want to.
ALEC HOGG: Please.
JAN PIERRE VERSTER: For instance, let’s take the provisioning methodology of African Bank, Capitec. Capitec would see a loan as being non-performing, after one missed instalment. Other big banks would see it as a non-performing after three months of missed instalments. African Bank saw it as a non-performing loan after five missed payments, so they were very, I would say they were less conservative in their provisioning methodology.
ALEC HOGG: That’s a big difference, between African Bank and Capitec. Presumably, you are not too worried about Capitec.
JAN PIERRE VERSTER: Yes, correct. As a standalone entity, we are not. There could be some implications from this. Some confidence implications for Capitec, but we think they will be a net winner of the situation.
@alechogg Why no mandatory Deposit Insurance and subsequent guarantee in ZA banking system? Paid for out of exorbitant banking fees?
— Mario Pretorius (@unconCEO) August 12, 2014
ALEC HOGG: But if you knew this, the market knew this as well, and yet, to you it was important. To other people, what were they thinking?
JAN PIERRE VERSTER: Exactly, so this was one piece of the puzzle, and I can go through and we can talk about Leon Kirkinis as a person being an optimist, which in most cases is a good personality trait. In cases where the environment is changing, it could be a dangerous personality trait.
ALEC HOGG: Did you actually go that deep? Did you say, “This is the CEO, we know and everybody knows he saw the glass half full. This is a problem, as an investor.”
JAN PIERRE VERSTER: It was part of the problem, yes. On its own, I don’t think anyone could see it as being a problem but in the context of a changing environment, new legislation, a strong growth period, which hides a lot of ills, one needs to be in touch with reality and through that over optimism, it was one piece of the puzzle. I touched on the change in regulations and that was another piece of the puzzle. We can talk about the acquisition of Ellerines, which they overpaid. A business model that clearly was broken. That was another piece of the puzzle.
ALEC HOGG: They brought in a strange guy if you remember, from Incredible Connection, to run…
JAN PIERRE VERSTER: Tony Fourie, yes.
ALEC HOGG: Yes.
JAN PIERRE VERSTER: Look, I have a lot of respect for Tony but I do think that, coming from Incredible Connection… All of a sudden it was a different retail consumer that he needed to deal with, and once again, if you have someone with not a lot of experience in that specific lower LSM market that’s another piece of the puzzle. Once again, it is a 1.000-piece puzzle. Some other people, other Asset Managers, maybe did not identify as many pieces of the puzzle as we did and, therefore could not see the picture that we saw, starting to form around African Bank.
ALEC HOGG: What made you so confident or sufficiently confident to talk publically about this, which is what you did?
JAN PIERRE VERSTER: Yes, it is actually strange. We were not planning on talking public about African Bank. In our hedge funds we are short a portfolio of companies, so we could be short 30 companies at any one time and we would not talk about them. I actually did an interview with a Bloomberg journalist and, off the cuff, we spoke about some of the opportunities we like, on the long side and the short side, and when he wrote the article, he focused on the short side, and African Bank. Through that, almost it was, forced into the public domain and then we needed to explain our thinking around it.
ALEC HOGG: As far as your clients are concerned, has the phone been ringing off the hook?
JAN PIERRE VERSTER: Our business is, structured into a hedge fund business and a long only business, so the clients that have been phoning are more the long only kind of funds and clients wanting to make sure that in our long only funds, our unit trusts, we did not have African Bank as a long exposure. They are very relieved every time we tell them, “We had zero exposure.” On the short side, obviously we made money for our hedge fund clients they are also quite pleased, I’m sure, about that. But they haven’t been phoning because they know the way we manage hedge funds is always with a Risk Management Policy, which means that we never take ‘hail Mary trades’, and one position that comes our way and works our way, does not make that big a difference in the context of the whole portfolio.
ALEC HOGG: Well R100m is quite a gain; however, you want to cut, dice, and slice it.
JAN PIERRE VERSTER: It is, so in the context of R8bn of hedge fund money, it would be a one-point-six percent of performance that would be, added by this.
ALEC HOGG: You did mention on the debt, the Abil debt. Now there’ve been quite a few deep value investors, who’ve been eyeing that debt for a while, taken their bets. For external observers you would have thought, with the company getting into so much trouble that that debt would be worthless today but, of course, that is not the case.
JAN PIERRE VERSTER: I think because we had a good grip, from an equity holder’s perspective, what was going on at African Bank, we could extend that to the debt environments. We did feel that there was some systemic risk, when it came to African Bank. Not from a depositor prospective, like with Saambou, but from the debt holder’s perspective, seeing that that debt was, held by income funds that, ultimately did have retail investors. So we did expect the regulators to get involved and protect, to some extent, the debt holders’ value, whether it was a ten percent haircut, which ultimately was what happened, or a 20 percent haircut. We did not think it would be more than, say a 30 percent haircut, so when could buy the Swiss Bonds, at a 55 percent discount, at 45 cents on the Rand, we jumped at that opportunity.
ALEC HOGG: What happened to the South African Bonds?
JAN PIERRE VERSTER: The South African Bonds are not trading. They are part of the suspension, similar to the Common Equity. Some money market funds and income funds have adjusted their evaluation or frozen that part of their portfolio, so some investors, when they request a redemption from an income fund of R100.00, might get R93.00 and seven-Rand will be held behind, because that is the African Bank exposure. No one really knows the true value but I would guess it would be close to 90 percent of the previous value.
ALEC HOGG: But as far as the Swiss Bonds are concerned, they are trading? You were able to buy them at 45-cents in the Rand and they are now nearly double that now.
JAN PIERRE VERSTER: We bought them at the end of last week, and we saw yesterday, when they were still trading that that re-pricing has happened, yes.
ALEC HOGG: Jan Pierre, what about actually delivering on your short positions? Did you go in last week and buy the stock because presumably, it would be very hard to pick up the shares now, if it’s suspended?
JAN PIERRE VERSTER: Yes, so once again, as a hedge fund business, we normally would not disclose all of this because it is sensitive and companies don’t like to hear, publically that someone is short their shares, so in this case we will talk about it because this is quite a specific situation, a special situation. We are still short the shares, at 31 cents per share; it is a very small short in our lives. We would still pay the carry costs, in terms of the fact that we borrowed these shares from someone who was long the share, so we still need to pay them for the benefit of having the script that we borrowed from them. At some point we need to close this position, so in the next two to three years, you might see a good bank being listed, you might see the equity of African Bank getting rights attached to them, to subscribe for that new bank, which today, has a zero NAV, by the way.
@alechogg Main question is who lent 36 One and Conatus the scrip to short… If it as an Asset Manager that was long for clients, Conflict!
— Justin Mark Davidson (@JDav27) August 13, 2014
A lot of people don’t understand that and I just want to quickly, touch on it. In the whole reorganisation, there’s a good bank and a bad bank. The bad bank gets, bought out of African Bank Investments Limited, at R7bn for R17bn Loan Book. That leads to an impairment of R10bn, in the listed entity, so the listed entity is insolvent. There is also a buy out of the Good Book, of R26bn, from the listed entity, into a good bank, so there’s an asset of 26. However, the debt holders also go long, which is 90-percent of R40bn of debt. That is R36bn, so you have 26 of Loan Book and 36 of the liability. That leaves a ten percent funding shortfall. That’s where the consortium of banks are coming in.
ALEC HOGG: To put in R10bn.
JAN PIERRE VERSTER: Correct.
ALEC HOGG: All right, so there’s R10bn shortfall, between the assets and liabilities, and what are the banks going to get for that R10bn equity, presumably?
JAN PIERRE VERSTER: It would be quasi-equity, yes and they would have that for the next, say two years, and if the good bank performs well, the debt holders will be repaid, some equity will be built out, through accumulated profits. The banks will want to exit because they are not in the business of owning stakes in other banks. The good bank will then list and allow that consortium to be, replaced as the shareholder, by public shareholders, so there’s quite a process still to come. In that, whole process there is some value attached, to the current Abil shares, but it is very little because the new bank is starting from a zero NAV.
ALEC HOGG: So the people who’ve bought Abil shares last Friday at 35 cents. It appeared to be a free option and that option has now expired, it is worth what, nothing?
JAN PIERRE VERSTER: Almost nothing, so I would say, as we stand today it is worth nothing. If the good bank performs very well and some equity gets, accumulated in that structure, it could be worth something, quite small but something.
ALEC HOGG: One cent, two cents or something…
JAN PIERRE VERSTER: Something like that, I expect.
ALEC HOGG: It is certainly not going to be back to 30 cents, as it was before.
JAN PIERRE VERSTER: No.
@alechogg how do you bank a profit of R100 million if the position is still open ? Carry cost of the short position until relisting
— sbu (@SC_RADEBE) August 13, 2014
ALEC HOGG: Can you tell us what else you’re short at or short of, at the moment?
JAN PIERRE VERSTER: No, like I said, we were almost, forced in the public domain, through this specific position but I can say, we are short say, 30 stocks at any one time. It does not cast aspersions on the management teams of the companies we are short. Most of the shorts are not because we think those businesses are going to zero, are going out of business. It’s more a case of evaluation, so we could be short a company we like a lot. We just think that the evaluation is ridiculous and there could be companies, which we feel even though it’s a great management team, it is structurally in a very difficult industry, and, therefore, from an evaluation perspective, once again, we are short. But people take short positions if they work at that company or, especially if they are the CEO of that company, very personal, and that is part of the reason why we don’t disclose it.
ALEC HOGG: I was reading the Katharine Graham biography again, over the weekend and, when Warren Buffet told her that Sequoia Fund had started selling her shares, she as the Chairman of Washington Post, burst into tears and
management don’t understand that. Jan Pierre, just to close off with though, sometimes you have a company making transaction or event, from 36ONE’s perspective, you have been a top performing Asset Manager already, in the time that you’ve been around, which is not very long. Do you think this could transform you into pushing you to a new level?
JAN PIERRE VERSTER: Hopefully it will take us through the next level, so the business was started by Cy Jacobs and Steven Liptz, and what they’ve done is, they’ve tried to attract as good a team around them as possible. The business is ten years old this year, and we do feel that we’ve got a great track record, as you say. We’ve got great people and that sets us up for the future as well, so hopefully this will be that extra, little indicator to show people what we are capable of. That we think differently. That we try to give that extra one-percent and, yes if people like that story give us a call and, hopefully we can manage their money.
ALEC HOGG: But what is it about your culture that is giving you the success rate?
JAN PIERRE VERSTER: Almost like the African Bank story. It is not just one thing. It is probably a collection of things. One thing I think is important is we do have a culture of excellence. We do not tolerate mediocrity. We have a performance culture. We, personally, gain from the gains we make for our clients, and the gains we make for our clients, through our performance fees, we also benefit, indirectly, so a lot of people don’t like performance fees. We love them. We feel it aligns interests and it’s the people in the organisation. We have a flat structure. No hierarchies, open plan office, lots of discussion, comfortable with the difference in opinion, and we think that builds a robust Asset Management Company.
ALEC HOGG: And your average age?
JAN PIERRE VERSTER: We have some grey hairs around as well, Evan Walker, who is with us – you might know him. We have some young guys, some guys younger than me. I’m 33 now, so we’ve got a good mix of wisdom and youthful exuberance.
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