Hedge-Fund Owner Peregrine Considers Split to Boost Returns

JOHANNESBURG (Capital Markets in Africa) – Peregrine Holdings Ltd., the operator of South Africa’s oldest hedge fund, is considering a plan to split the company by using profits from its stockbroking and wealth-management units to create a new investment firm. The stock surged the most in a year.

The company, which also owns half of advisory business Java Capital, has about 1.5 billion rand ($115 million) of surplus cash on its balance sheet that could be used to start the venture, Chief Executive Officer Jonathan Hertz, 44, said in an interview at Bloomberg’s Johannesburg office. The board still has to make a final decision and the proposal is one of the options it’s looking at, he said.

“The accumulated profit that Peregrine earned over the years and hasn’t been paid out as dividends has become substantial and materially exceeds the assets that are needed to run the business,” he said this week. The company is now “seriously considering whether to return the excess money to shareholders either directly or in the form of an investment vehicle given to shareholders that they can own.”

Peregrine, which had 105 billion rand under management as of Sept. 30, is seeking ways to divorce the balance sheet of the parent company from its operating units. Having a separate operating business will make it easier to value the company because it will avoid some of the volatility to earnings that comes with investing excess funds in capital markets. The surplus comprises about 600 million rand invested in hedge funds, including Peregrine Capital, 350 million rand from Channel Islands-based Stenham Ltd., as well as other sundry investments.

The company’s share price surged as much as 6.7 percent, the most in more than a year on an intraday basis, before paring gains to trade 0.9 percent up at 26.93 rand as of 4:12 p.m. in Johannesburg. Share volumes were 2.2 times the three-month daily average. Peregrine has a market value of 6.1 billion rand.

“One of the problems Peregrine has is that it has quite a big balance sheet relative to its size,” Hertz said. “You invest your money in things that go up and go down so your earnings don’t have a smooth road. There’s quite a bit of work being done to explore a restructuring of the business, splitting out the balance sheet from the rest.”

Bradley Preston, a fund manager at Cape Town-based Mergence Asset Managers Ltd., which owns shares in Peregrine, said the company’s underlying businesses are expected to keep producing sound earnings.

“For a while Peregrine has been a potential take-out target and excess capital on the balance sheet makes that attractive, but no buyer has been successful as yet,” Preston said by email. “This proposed split could be an alternative way to unlock value.”

‘Focusing Business’
Should the board decide to separate the excess capital from the company’s divisions, the operating business would likely pay out almost all of its profit, less any required working capital increases, in dividends, he said. The new investment vehicle envisaged in the proposal would be able to take on additional capital, hold about half of its assets offshore and possibly trade at a discount to its net asset value, Hertz said.

“It’s a focusing of the business,” he said.

The shakeup comes as Hertz gets ready to step down as CEO at the end of June to devote more time to Alpha Capital Management, a Bermuda-based investment-management business he started in 2008. A split would make it easier for the new person to run the operations, he said, adding that there are several potential candidates vying for the post.

The stock has more than tripled since he took the post in April 2013, exceeding the 49 percent gain of the FTSE/JSE Africa All Share Index.

The new investment vehicle may seed nascent financial-services companies that Peregrine hopes to grow into major players, Hertz said. They would join Peregrine stablemates such as Citadel Investment Services in Cape Town, stockbroker Peregrine Securities in Johannesburg, and Stenham, which offers asset management, trust and fiduciary services.

“This business makes 600 million to 700 million rand of cash a year but actually one of the more complex decisions is deciding what to do with the cash,” Hertz said. “To be in a listed environment is quite a tough situation. And when you’ve got complexities in your business and when people can’t value it easily, it’s exacerbated the problem.”