ARC Investments to spend R205m from rights offer on management fees
African Rainbow Capital Investments will spend R205 million, or 27%, of the R750 million it intends raising through a rights issue to pay outstanding fund management fees to (effectively) its parent.
The company announced the rights offer last week and said the additional capital would be invested “in the ARC Fund for use in its existing portfolio companies as well as for future acquisition opportunities”.
It also said some of the proceeds would be used to settle “the outstanding Fund Management Fee”. It provided no further details until the publication of the circular on Monday.
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In the circular, it was revealed that the Mauritian-based JSE-listed investment holding company had accrued fund management fees totalling R205.66 million over the last financial year (from July 2019). These payments are due to general partner UBI on a quarterly basis. UBI then pays through 95% of the fund management fee to (unlisted) African Rainbow Capital as an investment services fee. African Rainbow Capital is majority owner (51.1%) of ARC Investments, which in turn owns the majority of the ARC Fund. This houses all the group’s investments save those in the financial services sector which are co-owned by ultimate parent African Rainbow Capital and ARC Investments (via the ARC Fund).
Group structure
ARC Investments notes in the circular that if the fund management fee is “not paid on the due date, it accrues interest at the prime rate plus 5%”. The R205.66 million payable excludes any interest as the “general partner has agreed to waive all accrued interest on the outstanding fund management fee provided that it is settled at the time of the rights offer”.
What is curious is that the pre-listing statement specifies that any late payments of these fees “shall bear interest at the Prime Rate plus 2% per annum”. This suggests the agreement has subsequently been changed with any arrears now attracting a substantially higher interest rate.
Convoluted settlement plan
To avoid the flow of funds between the parties to settle the various obligations, they have agreed on a convoluted manner of ensuring settlement through subscription in the rights offer process.
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