10 000% and counting over 25 years: The remarkable Peregrine Capital story

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By investing R1 million in the Peregrine Capital High H4 QI Hedge Fund (the “High Growth Fund”) when it launched, you would have over R130 million today. But the exceptional figures that formed the basis of this incredible success story of South Africa’s first hedge fund manager over its 25-year history goes far beyond returns. 

“Hedge funds have come and gone internationally and domestically. Longevity hinges on consistently producing market-leading returns for your clients in any circumstances,” states Peregrine Capital Executive Chairman and Co-Founder David Fraser. 

As the oldest hedge fund manager in South Africa, Peregrine Capital has successfully navigated multiple global market crashes, several bear markets, and the idiosyncrasies that make investing in South Africa complex and challenging. Our flagship Peregrine Capital Pure Hedge H4 QI Hedge Fund (“the Pure Hedge Fund”) achieved the distinction of never having experienced a negative year in its 25-year history. 

This unprecedented track record sets Peregrine Capital apart from its hedge fund peers, with consistent investment performance that rivals the best global asset managers. 

An enduring legacy is born 

Peregrine Capital was founded on 1 July 1998 by Fraser and Clive Nates as a boutique asset management firm focusing on hedge fund strategies. 

The launch coincided with the emerging market debt crisis that caused a global economic slowdown. The impact on South Africa’s commodity-led emerging market economy was severe, causing rand depreciation, high inflation rates and rising interest rates.

“We received R33 million in seed capital from Peregrine Holdings following its IPO and deployed this into opportunities that we had identified using a disciplined research process and a flat decision-making structure that allowed us to implement investment ideas rapidly,” explains Fraser. 

“Most of the seed capital was allocated to arbitrage opportunities to take advantage of various holding companies and N-share control structures that dominated JSE-listed companies at the time. By buying into these control structures, generally at a large discount to the asset’s underlying value, the fund benefitted from unlocking these discounts as the control structures collapsed,” elaborates Fraser. 

Consequently, the Pure Hedge Fund returned 133.81% in its first year when the JSE All Share Index shed 10%. 

This performance created a solid foundation for the fund manager’s long-term success and set the tone for the hedge fund’s formative period. Within a year, Peregrine Capital hit its first major milestone by surpassing R100 million in assets under management (AUM). 

Read also: Hedge funds should form part of your investment portfolio in 2023

Sustaining the momentum 

When the dotcom bubble burst in 2000, Peregrine Capital was ideally positioned to deliver returns in difficult conditions. By ignoring the irrational exuberance in US internet and local stocks that pushed valuations to unsustainable levels, Peregrine Capital had minimal exposure to tech stocks, with cash on hand to deploy into emerging opportunities. 

When the dust settled on the dotcom crash and the US recession ended in 2002, equity markets had lost $5 trillion in value from their peak, with the NASDAQ down 78%. While losses on the JSE were less severe, the bourse dropped in both 2000 (-2.64%) and 2002 (-11.15%). 

In contrast, the Pure Hedge Fund returned 28.90% in 2000 and 22.29% in 2002. The High Growth Fund was launched in 2000 and performed even better, returning 37.40% that year and 31.90% in 2002. 

The next big play 

As the world emerged from recession in the early 2000s, Peregrine Capital identified an opportunity to benefit from the liberalisation of gambling laws in South Africa.

“We recognised the industry’s growth potential, which proved a good hunting ground for us. We held several shares that owned casino licenses,” recalls Fraser. 

Peregrine Capital established positions within HCI, Real Africa Holdings, Aquila and Gold Reef Casinos. 

“At one stage, we owned 15% of Golf Reef Casinos at an average price of R1/share. We held this investment until 2007 when we sold our stake at over R30/share on the back of a private equity bid for the company.” 

A diamond in the rough 

Following a sustained period of global economic prosperity, which helped lift all boats on the rising tide, Peregrine Capital saw AUM surpass R1 billion while delivering market-beating returns. 

Current CEO Jacques Conradie joined Peregrine Capital in 2007 as an investment analyst, ushering the next era in the fund manager’s leadership – the same year that the global financial crisis (GFC) resulted in the abrupt end to the bull market. 

By 2008, the JSE All Share Index was down 23.23%. While the High Growth Fund also fell 11.98% that year, that was half the losses experienced on the JSE. However, the Pure Hedge Fund produced another positive return in tough conditions to finish up for the year. 

Amid the GFC fallout, the Peregrine Capital team maintained their composure and kept hunting for the next big investment. 

“There are always great opportunities out there. Every day is Day One for us.  We keep our eyes open for new opportunities and are never complacent,” explains Conradie. At the time, Capitec transitioned from high-risk micro-loans to a low-cost banking services provider for the mass market. 

“Capitec had fewer than 1 million clients, and no fund managers considered the company because it was so small,” recalls Conradie. 

After significant due diligence, the funds were invested in Capitec at roughly R40/share. 

“Capitec subsequently grew to over 20 million customers, and the share price rose in unison. We exited our position in the bank at between R1,100-R2,000/share, delivering exceptional returns for investors,” explains Conradie. 

In 2014, Peregrine Capital closely monitored the collapse of African Bank, Capitec’s largest competitor. As other investors were retreating in haste, Peregrine Capital emerged as the largest buyer of African Bank’s offshore debt following the collapse, snapping up these bonds at a significant discount to their face value.

Many investors hesitated to get involved in the African Bank bonds, given the grim circumstances surrounding the collapse and the potential reputational risk of associating with a bank’s failure. However, Peregrine Capital’s bold, contrarian approach yielded substantial benefits. The African Bank bonds eventually became one of the most lucrative investments in Peregrine Capital’s history.

SA politics weigh 

Six years after Jacob Zuma became president, it became clear that the deliberate, calculated erosion of governance in the South African state had culminated in greater levels of corruption, lower business confidence and slower economic growth. As law enforcement agencies were infiltrated and neutralised, Zuma’s actions became more brazen. 

Market panic reached a crescendo when Zuma fired Finance Minister Nhlanhla Nene in December 2015. This event sent equity and bond markets into a tailspin, and the Rand depreciated significantly against other major currencies. This began a period of significant uncertainty and instability in South Africa and our markets. 

During this period, when market commentators were predicting “the end of South Africa”, the Peregrine Capital investment team remained resolute in their investment approach, yielding strong results for the funds. 

Justin Cousins, Executive Director and Portfolio Manager, recalls a specific investment in the listed property sector that drove strong returns during this turbulent period. “Our team was one of the first institutional investors in New European Property Investments, a retail property developer and owner that began life in Romania. NEPI delivered strong and consistent per-share earnings growth year in and year out and became the dominant retail property company in Central and Eastern Europe. NEPI delivered an attractive and growing dividend yield to investors and saw its share price rise from R25 to R150 over the five years when we were invested. NEPI was a strong contributor to our funds’ returns and provided fantastic geographical diversification benefits when returns in SA were difficult to come by”.

The COVID crisis 

Despite Cyril Ramaphosa replacing Jacob Zuma as President in 2018, the local economy struggled amid rising global economic headwinds and worsening power supply from Eskom. 

Then the COVID-19 pandemic triggered a global economic downturn, hitting South Africa hard due to the strict lockdown regulations. Real GDP contracted by 8.2% in 2020, the JSE experienced significant volatility, and the Rand depreciated to a record low. 

Peregrine Capital realised the potential risk early on and purchased portfolio protection in the form of S&P put options to provide the funds with significant downside protection. 

Conradie said, “This protection gave our investment team the headspace and ability to make great investments when markets crashed,” 

“Making the most of a crisis means being well-positioned when drawdowns happen, to have the capacity and confidence to engage the market when it drops. It is critical to be on the front foot going into a crisis,” adds Conradie. 

In this regard, the put option insurance ensured Peregrine Capital had significant capital to deploy into the sell-off. “We were able to acquire substantial interests in well-capitalised companies that would likely benefit because of the pandemic, like those in the payments, gaming, and technology sectors, earning investors significant returns during the rebound,” continues Cousins. 

Despite lingering effects from the pandemic, the High Growth Fund and Pure Hedge Fund ended 2020 up 17.0% and 12.2%, respectively. 

This performance helped Peregrine Capital become the first fund manager in South African history to achieve a 10,000% return, effectively returning 100x the initial capital investment since inception. 

Read more: Learnings and investment advice from South Africa’s longest-running hedge fund manager

Coal-fired returns 

In 2021, Peregrine Capital added another high-profile investment to its long list of standout performers. Through extensive market research, Peregrine Capital identified the unbundling of Thungela Resources by Anglo American as a potential opportunity at a time when coal investments were losing favour among the wider investor base due to the increasing impact of ESG investing

“We acquired shares shortly after the company’s listing at between R24 and R30/share, which we deemed an extremely attractive price,” explains Conradie. 

Over the next 18 months, the coal market played out extremely favourably due to the impact of ESG on coal supply and, in early 2022, more significantly, the Russian-Ukrainian conflict. 

“After increasing our stake following Russia’s invasion of Ukraine, we sold out of our position once the share price reached our fair value estimate at above R300 per share, which required significant conviction at the time,” explains Conradie.  The funds made a 15x return in about 18 months, making this the best single investment in Peregrine Capital’s history.

Sticking with what works 

The ongoing success of the two flagship funds, coupled with improved accessibility of hedge funds via the LISP platforms, helped Peregrine Capital enjoy robust inflows from retail investors. 

It seems that hedge funds have finally hit the mainstream in South Africa. “Over the past four years, it’s been amazing to see how the adviser community has come alive to the value our funds and this asset class offer their clients”, said Alan Yates, Peregrine’s Head of Distribution. 

As Peregrine Capital celebrates its 25th year, the fund manager proudly owns the title of South Africa’s longest-running hedge fund.  “We have absorbed whatever the market has thrown at us over the past 25 years, and we remain confident about the resilience of our investment process,” states Fraser. 

“Our purpose is to grow the wealth of our clients. We invest our own money alongside them and passionately believe in what we do and how we do it, and we never forget who we do it for. We value the trust our clients have placed in us, and it is through our performance that we demonstrate our commitment.” said Fraser.

Tania Formilan, COO and CFO, added, “Our people are empowered to build on the strong foundation created by our founders. We have an exceptional team of professionals responsible for consistently applying our tried and tested approach and a set of values that generate market-leading returns for our clients.”

“Ultimately, performance to date is at the heart of everything we do. Our track record has been built on a foundation of unrelenting hard work and disciplined research, where analysts and fund managers hustle harder than anyone else in the industry to obtain an edge. We remain optimistic about our ability to find attractive opportunities in South Africa,” explains Conradie. 

“Couple this work ethic with a sound investment philosophy that consistently informs how you pick stocks and the emotional stability to execute this strategy in the bull and bear markets, and you have Peregrine Capital’s formula for success. We can’t wait to see what the next 25 years bring!” he concludes.