đź”’ George Manyere tells Magnus Heystek: THIS is how Ecsponent will repay investors

Magnus Heystek is a household figure among South Africans with an interest in personal finance and investing. He has his name on a a string of personal finance books and has probed various investment scams over the years, ringing the alarm for the broader community. When he first encountered the preference shares on offer from Ecsponent, a company listed on the Johannesburg Stock Exchange, something didn’t smell right. The returns were too good to be true, and it was not clear what Ecsponent was doing to ensure a steady flow of money back to investors. So, Heystek discouraged the clients of Brenthurst Wealth Management, his firm, from taking up the offer. Recently, it emerged that Ecsponent had got into difficulty, reneging on redeeming R188m of preference shares. In this podcast with BizNews founder and editor-in-chief Alec Hogg and Heystek, Ecsponent’s boss George Manyere pours cold water on concerns that investors will lose their money. Manyere outlines his plans to fix the problems at Ecsponent. – Jackie Cameron

An interesting story among the small caps, is a company called Ecsponent. We have the major shareholder in the studio, George Manyere. One of the bigger critics of Ecsponent over recent times has been Magnus Heystek who joins us now on the line. Magnus, we spoke about Ecsponent about a month ago. You were concerned about the way that they’d gone about their business – raising money by selling preference shares at high interest rates. As a consequence of that, you were warning people – 4 to 5 years ago – not to support them and now, those preference shares are no longer being serviced. Maybe just recap quickly and we can put your questions to George, who is sitting next to me.
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Well we couldn’t understand the model. It was marketed to, let’s say, conservative investors as an investment that gives them a very good and predictable interest rate via a preference share scheme and we could never understand where the money was invested, so that was the first issue. I think the underlying risks in the underlying investments were glossed over and not explained fully and once again, you have a situation where unsophisticated investors who simply just want their investment and a recurring income, were duped into buying these products, not fully understanding the underlying risks. We tried very hard to find out how the underlying entities were actually doing and five years ago, the economy was still fairly strong but as time went on and the economy started faltering, one had to ask questions about the viability of the underlying companies.

That’s pretty well-put. George, you’ve heard what Magnus had to say. What’s your response?

Thanks, Alec. Thanks for having me here and Magnus, thank you. Good to meet you. Now, going straight into your observations four or five years ago, I would like to say yes, I agree with you. My group only invested in Ecsponent about 18 or 24 months ago and post our investment, we did undertake a post-investment due diligence and we also questioned the exact model. What attracted us was that we were able to say, “Okay, the business is financing itself from expensive debt and on the asset side, it was running a credit business, which ideally, was matching the servicing of those prefs.” Most of this credit exposure was in micro-finance businesses across Africa, of which South Africa was included, so the margins that were being earned, or the interests with which they were being earned, was able to be serviced. However, there was a significant concentration risk to one group, which was MyBucks. If this was diversified then yes, we could be talking of a different situation here, so we had a situation where we identified that the failure or success of MyBucks would have a strong bearing on Ecsponent.

How did you get involved in the first place?

I built a private equity firm in Zimbabwe after leaving the IFC. I was an investment professional with the World Bank. Then I built Brand Works in Zimbabwe and one of the sectors – we were quite diversified,  banking, real estate, and tourism – we identified that we wanted to be in micro finance. Our business model, which I apply all the time, is I invest alongside strong international operating partners or partners who understand a particular sector. So, we wanted to get into micro finance. We’d seen an opportunity and we looked at all the regional players and, in the end, we did choose to partner with MyBucks as our partner in Zimbabwe. So, we created GetBucks Zimbabwe, which became the best operation across the group, got listed on the Zimbabwe Stock Exchange. It paid dividends of more than $10m over six years and is the biggest micro finance bank in Zimbabwe.

So, how did you get sucked into Ecsponent?

MyBucks were my partners in that business, which was quite successful. Then, when I listed Brand Works on the JSE, I cashed out and I needed a regional platform that I could continue my private equity investment business – not off a Zimbabwean base, but obviously, in the biggest capital of business in Africa, which was Johannesburg. So, that’s how I got into Ecsponent.

We spoke to Dave van Niekerk also about a month ago and he was pretty excited about MyBucks, which is listed in Europe, saying that the valuation of MyBucks is huge and in fact, that Ecsponent’s share in MyBucks is worth a multiple of the 4c at which the shares are trading on the JSE. The markets get it wrong, but they don’t usually get it that wrong.

Right, there is a key distinction and it leads to the discussion we’ve been having with David Shapiro just now. There’s one way of looking at businesses based on stock market valuations and MyBucks, because it was positioned as a tech business ever since it was started, we’ve seen the world over what has happened to tech companies. They become unicorns, yet they’ve never made a profit. They’ve lost billions and billions of dollars. This was exactly the case with MyBucks. It has lost cumulative profits of about €60m, such that by last year in its recent financial results, it had negative equity of €45m. That’s close to R1bn. But with tech companies: the global investors understand that. I’m a private equity investor. I invest for the medium to long-term. I look at the underlying value and we focus on real value because at some point, we have to sell these assets and realise the cash for our investors. So, I think some of the market players who have had exuberant views around valuations, based on stock markets, is not how I look at things.  I look at the substance and the intrinsic value of the business.

How are you going to fix this thing? Because now, you’ve got pref shares that have not been serviced.

I think the first critical thing that we needed to do was to exhaust all channels of trying to monetise our investment in MyBucks, which unfortunately, had crystallised in the last six months of last year. The process started almost 18 months ago and as you can see from our announcements, there was a number of transactions that we’d done, which built Ecsponent’s equity investment from zero to pretty much 40% and that was all by default because the security on those loans was MyBucks shares. We invested in MyBucks – not necessarily by design – it was by default of the loans that we secured with MyBucks not being paid back either by MyBucks or indirectly, so we ended up in that position. It’s not the first time for me. My business model throughout has been to take over businesses that are struggling, put them through a thorough restructuring, which is what we’re doing now and from last year, we took control of MyBucks. We changed the governance and. the leadership of MyBucks. We’ve had about 110 people leave. We’ve shrunk that head office to less than 5 people. We have closed the tech business side. We’ve closed the lending business. What we are left with, is the only business unit that was profitable, which was the banking arm. So, we are in six African countries: Botswana, Zimbabwe, Zambia, Malawi, Mozambique, and Uganda. That was the profitable business arm of MyBucks and for the last three years, it made a cumulative profit of €20m. The drag in MyBucks was the head office cost/tech and the lending businesses. Unfortunately, South Africa was the biggest loss leader in all of that and a cumulative of €60m was lost out of that, the nett position put MyBucks into a negative equity. What we then did, after taking control of MyBucks together with other investors in Europe, was to convert our debt into equity to bring the business to positive equity, which is what we completed in December and now the business is starting to recover but it’s a medium to long-term process. It’s not a short-term issue.

But what about the resignation of directors Richard Connellan (who’s highly-respected in South Africa), Shaka Sisulu who told me he’d just come on the board, so it was too confusing for him and he then left.

Yes. Obviously, whenever you lose directors, it’s always unfortunate as a listed company, we owe our former chairman a lot. He’s been great. He’s been the founding chairman since 2010. He was just about to complete his term of 10 years, so it was just by coincidence and he had another opportunity that was going to be in conflict. I wouldn’t say exactly that he left because of this issue. I had just come in and I needed to learn from him for at least a year or two before taking over as chairman. I was the deputy-chairman all along. For Shaka, it’s unfortunate. He came in right in the middle of the storm. We felt it was critical to go through this restructuring but we will resource the board with other qualified professionals. We believe in strong governance. We believe in strong management between Ecsponent and MyBucks. We’ve done some major management changes but what is critical, is for us to ensure that we reposition the group’s investment portfolio to be able to bring back value for our investors in the preference shares. Those pref investors’ monies haven’t been lost. It’s just that the mismatch that was created out of this switch from credit to equity investment has put us in a situation where to monetise it, we need at least the next couple of years to rework the portfolio.

So, you’ve suspended payment on preference shares. You haven’t cancelled them. You haven’t defaulted.

Yes, exactly. What we have done is the structure of the preference shares -when it was designed five or ten years ago – included a provision that in the event that the company’s portfolio switches and there’s a default or a missing of one payment; if the company doesn’t remedy that within three months, the prefs will convert into equity. So, that’s the default position that happens. By virtue of MyBucks having defaulted on its loans to Ecsponent, Ecsponent having to settle with shares in MyBucks – it has a cascading effect – now, we are saying, “Fine. Yes, there’s a default conversion into equity. However, we want our preference shareholders to maintain their preferential right.” However, we need to amend our memorandum of investment into a new class of prefs that will mimic the cashflow plan.

So, George, what you’re saying in a nutshell, is “Just hang in there”. You’re going to fix it.

Yes.

Magnus, what do you say to that?

Well, I sincerely hope that George can turn it around because there’s quite a lot of money at stake and I’m glad the way he explained it because in a nutshell, that was exactly the problem we had at Brenthurst. We simply couldn’t work out how the underlying model works and how it funds the preference shares and once again, we have a situation where unsophisticated retail investors simply look at the yield on their investment, whether it’s 10, 11, or 12.5%  and they simply say, “That’s what I’m going for. End of story” and we got approached by clients saying, “This is fantastic.” Can’t we get it for them? We simply spent some time and said we can’t recommend it. We just don’t know 100% how this model works and for that reason, we declined to get involved. However, it was marketed extensively in Pretoria, seminars, advertising and on Radio Pretoria as a very safe alternative to a bank investment or a money market investment and that’s where the difference comes in. Investment advisors under massive scrutiny before they recommend any investment and for that reason, we simply said, “Nothing against the company, but we’re not comfortable with the business model.”

Magnus Heystek, the chairman of Brenthurst and also, we heard from George Manyere who’s the major shareholder of Ecsponent. Hlelo Giyose from First Avenue Management have you heard the story. Perhaps George is the last hope for those investors and those pref shareholders.

Actually, I wanted to ask a question, George. The pref shareholders: are they going to be compensated for the time value of money lost?

So, I think what we’ve done is the new pref that we are proposing… the terms will include an upside participation and the realisation points of the assets as we dispose them in the next couple of years, so there will be upside potential on that.

And if, for instance, assets that are being disposed in this sort of market, don’t fetch the value and the prices that you wish they could, what happens to pref shareholders? Do they just now resort to equity and lose everything?

Investing in equity doesn’t mean that you lose everything. I think it’s just a matter of making sure that when an investment risk crystallises… Today, we’re talking about Sasol being down 43%. It doesn’t necessarily mean that Sasol is not worth anything. It’s the same situation we have where unfortunately, we believe it’s a temporary problem. MyBucks has fallen from as high as €15 per share to levels below €1 per share and we happen to have been exposed to that investment, and it’s worse when it is Europe and capital markets. So, our plan as private equity practitioners now, is to say, let’s put these assets under a private equity investment ethos, rather than a short-term/looking at the stock market. Our biggest objective is to ensure that we rework these assets for the benefit of the investors and we recover 100% for the investors but in the short term, we don’t want to monetise any losses.

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