Half of the companies originally listed as SPACs have already delisted on the JSE. It’s a big missed opportunity

By Phakamisa Ndzamela

The poor showing of Special Purpose Acquisition Companies (SPACs) on the JSE in recent years is depriving South Africans of the opportunity to invest pension savings in transparent listed infrastructure assets.

A few years ago, SPACs were all the rage globally, having first listed in the US in 2003. The way it worked is, a SPAC would list with plans for how to invest any money that investors put into it. On the JSE, if a company failed to make any acquisitions within 24 months, that capital would then be returned to the shareholders.

In essence, a SPAC was a punt on the deal-making ability of that fund’s management, its investment strategy, and the quality of the people involved.

But while a number of SPACs listed in the past decade, appetite has dried up so fundamentally that no new SPACs have listed since July 2017. If anything, the trend has been going the other way — in May, a renewable energy firm listed as a SPAC in 2016 delisted.

At the time of going to print, cannabis company Cilo Cybin had promised to float on the JSE as a SPAC. It says it wants to acquire companies in biotech, cannabis, psychedelics, wearable devices and custom nutrition.

This lack of appetite hasn’t been great for the JSE. Established during the peak of the gold rush in Johannesburg in 1887, SA’s largest stock exchange has been struggling to stem the flood of delistings. From a high of 601 companies in 2000, this has now fallen to nearly half that — reducing the options for retirement savers, and further concentrating pensioners’ capital in a smaller cluster of firms.

Amid all these ructions, the JSE says the need to raise capital for new energy projects, in particular, is an opportunity that SPACs should be exploiting.

“SPACs offer investors and targets a new set of financing opportunities that compete with later-stage venture capital, private equity and direct listings,” says Patrycja Kula-Verster, business development manager of the capital market division of the JSE. “They provide an infusion of capital to a broader universe of companies that wouldn’t necessarily come for a front door listing, fuelling innovation and growth.”

Kula-Verster says energy-focused SPACs are a vehicle “to address the electricity crisis”.

But one reason why more SPACs haven’t listed is that there are a number of rules around this. For example, to list on the JSE’s main board, a SPAC must raise a minimum of R500m; R50m to list on the small cap AltX.

Until now, most SPACs that listed on the JSE have transitioned to become infrastructure companies focused on renewable energy, affordable healthcare and technology. Since 2014, eight SPACs have listed on the JSE, raising over R2.7bn. However, half of them have delisted. 

By contrast, SPACs have done fantastically well in the US. Statistics from SPAC Analytics, a provider of investment data, shows that a record 613 SPACs were listed in the US in 2021, raising $162.5m.

Kula-Verster says people ought to understood that not all SPACs will find high-performing assets to buy, so some would fail. The Public Investment Corporation (PIC) has been the anchor investment in SPACs, followed by the Eskom Pension and Provident Fund (EPPF).

Some roses among the thorns

But even locally, there have been some success stories — foremost of which is Renergen, which began as a SPAC on the JSE.

The company, led by Stefano Marani, Nick Mitchell and Brian Harvey, describes itself as an emerging producer of helium and liquefied natural gas (LNG), with existing production of compressed natural gas.

So far, it’s done pretty well for investors too. When it listed on the JSE’s AltX market, it raised R72.9m by selling shares at R10 per share. Today, it trades at around R36 per share.

In its annual report for the year to February 2022, Renergen said 87 retirement funds own about 10.09% of the company, which is now worth R4.8bn.

This includes the Government Employees Pension Fund (which owns 5%), the Eskom Pension and Provident Fund (2.06%), and the Municipal Workers Retirement Fund (0.44%). But new investors are coming in every day, including the Central Energy Fund, which said it would invest R1bn for a 10% stake in the Virginia Gas Project owned by Renergen.

Another company established as a SPAC is Capital Appreciation. Billed as a financial technology company, it listed on the JSE in 2015, raising R1bn at R1 per share. Today, its share price is about R1.60 — suggesting a nice return for the early investors.

When it comes to total return, CEO Bradley Sacks says that R1000 invested five years ago would have delivered you R3058 — a 25% return per annum. Since 2018, Capital Appreciation has paid dividends equal to 26c per share.

Sacks says the support a SPAC gets depends largely on the reputation and networks of the founding members. In the case of Capital Appreciation, all the executives — Sacks, Michael Pimstein, and Allan Salomon — are former CEOs of high-profile businesses.

Asked what kept Capital Appreciation strong when other companies that started as SPACs faltered, Salomon says the money it raised “has been very prudently managed and invested in companies with established track records in high growth sectors”.

Salomon says the founders ensured “that all the necessary governance and controls are established to run this new company like a well-established, mature business.”

But is it worth it? A listing, after all, can be expensive and time-consuming.

Sacks says the problem for some of the smaller companies is that they found it hard to get the attention of institutional investors, so they weren’t able to get the capital they’d hoped for.

By contrast, about 50 retirement funds hold 30.76% in Capital Appreciation, with the Government Employees Pension Fund (GEPF) holding 25%. This amounted to a R630m exposure for the retirement funds.

Says Sacks: “Smaller and younger companies find it difficult to attract institutional shareholders as their shares are generally not liquid enough for the large funds.”

He argues that this company has also, through its payment products, helped broaden access to financial services, making it cheaper for businesses and SMME’s to access payment facilities such as card terminals.

For example, Capital Appreciation owns 35% of GovChat, a company which partnered with the SA Social Security Agency (Sassa) to support the digitisation of the Covid social relief grant application process. Millions of people used GovChat to apply for the Covid grant.

… and those who’ve performed miserably so far on the JSE

The other two companies that started as SPACs but remain listed on the JSE are Mahube (previously GAIA Infrastructure Capital), and RH Bophelo.

When Mahube listed as a SPAC, its MD was John Oliphant, the former principal officer of the GEPF. However, in 2016 Oliphant resigned and went on to spearhead the formation of RH Bophelo.

When Mahube listed (as GAIA) in November 2015, it raised R551.5m after issuing 55,1m new shares to investors at R10 per share.

In 2016 the proceeds were used to buy a 25.2% interest in the Dorper Wind Farm, a 100 MW plant in the Eastern Cape. The wind farm helped Mahube earn its first investment income and put it in a position to pay its first dividend of 63.5c per share in the year ended February 2017. Since listing, Mahube has paid a total of close to 320c in dividends per share.

But today, Mahube’s share price is trading at about R5.40 — a discount to both its net asset value of R11.21, and its R10 per share listing price. Retirement funds hold about 45.3% of the company, while the GEPF owns 43%. Mahube’s executive team is led by Gontse Moseneke as CEO and finance director Petro Lewis.

The last company to list as a SPAC on the JSE was affordable healthcare group RH Bophelo, which manages 1696 hospital beds, both in hospitals it owns and under contract for others. Its aim has been to improve people’s lives by offering affordable healthcare while generating good returns for shareholders.

Unfortunately, it hasn’t been a great story for investors. When it listed, it raised R500m by issuing 50m shares at R10 per share. Today, even though it has a net asset value of R13.97, the shares are trading on the JSE at nearly a quarter of that, at R3.60. It did, however, declare a maiden dividend of 15c per share in May 2021.

Again, the PIC is the bulwark investor, holding 67% of RH Bophelo by February 2022. RH Bophelo’s CEO is Quinton Zunga and its chief financial officer is Dion Mhlaba.

Tax incentives needed to lure investors

So why have SPACs not caught on as an investment?

Oliphant, chair of RH Bophelo, says there were structural challenges in the investment process, including some tough investment limits.

“The challenge we have in SA is that if you look at the listed mandates, the typical mandate that a pension fund would give to managers, it will have certain constraints in it. The first constraint will be around liquidity. They will say: if you manage money in the listed markets, you need to buy companies that you can get out of in less than 10 trading days,” Oliphant explains.

Size also limits investor appetite. Companies with a small market capitalisation battle to attract capital. “A typical portfolio manager will not even entertain them. If your market cap is less than R2bn, they will tell you to come back to them when you are bigger,” Oliphant says. 

For SPACs listing with a R500m market capitalisation, this obviously hurts.

“If you take RH Bophelo, for example, we have gone on a roadshow [and] every time we meet investors, the first thing they will say is ‘we like your story because healthcare has become unaffordable’,” Oliphant notes. But, he says, this doesn’t necessarily translate to investment.

It’s a problem that must be solved, since the JSE is losing companies almost every month, and this obviously has implications for how many jobs can be created.

“So, what is to be done?” asks Oliphant. “In my view there must be a concerted effort from government, in particular National Treasury, to firstly diagnose the problem appropriately and say there is a problem in terms of a mismatch of capital allocation in our economy.”

Then, he says, one solution would be to introduce incentives for pension funds to invest in companies that make a social impact. This could include tax incentives — either capital gains tax or even direct tax benefits — for pension funds that invest in those companies which have a market value of less than R2bn. Because, he says, you ignore companies like his at the country’s peril. The importance of RH Bophelo, for example, was made clear during Covid when there was a shortage of hospital beds. By turning up their nose at SPACs, investors are losing a golden chance to do something important for the country.