Investment Approach

Private equity
Activa’s investment philosophy is to take meaningful equity interests in quality companies and in the process becoming a strategic, value adding shareholder and partner to management. Our focus is on the South African and rest of African markets and the size of target investments varies from medium sized privately owned businesses to large multinational companies. Activa considers investments in any sector with a bias towards businesses with strong cash-f low generation potential and a Net Asset Value underpin.

 

Activa is following an opportunistic approach utilising its principals’ networks to identify unique opportunities not pursued by other investors covering all sectors of the economy. The larger private equity investors in SA are all focused on ‘mega-deals’ valued at multibillion Rands. There is therefore a broad value range of transactions under the radar screen of these players. Attractive growth opportunities are expected in this value range and in particular in private companies.


In order to offer investment opportunities to funders over a wide range of sectors and valuations, Activa deliberately did not raise a dedicated private equity fund with a resulting limited mandate. Activa has relationships with various local and international investors with the intention to match a specific investment with the appropriate investor. All investment decisions are made by Activa in conjunction with the investor/s on a case-by-case basis.


The following types of investments are typically pursued:


Management buy-outs or buy-ins
Investments in quality businesses in growth sectors are made in conjunction with experienced management teams (either existing or new teams). It is very important to ensure that the interests of shareholders and management are aligned. The preference is to be in a position of control or at least joint control. Activa will however consider to invest in minority stakes as long as appropriate minority protections are agreed upon. Ideally the investor would assume a very limited, if any, operational role in investee companies.


Turn-around situations
In addition, investment banking opportunities are sought where the investor takes an active role in the management of the investment target in order to release value to the investor. Two strategies are followed in this instance: (a) Surplus assets of the investee company are realised and value is returned to shareholders as soon as possible; or (b) Control is acquired of a target at a shareholder and/or board level and a new strategic direction is taken by the investee company.
Turn around investment opportunities take at least three years to emerge from poorly managed situations and another two years to establish a successful trading history.


Shorter-term investment horizon
Activa will also pursue opportunistic investments offering the prospect of a realisation (e.g. through a trade sale or listing) in the short-to-medium term. Normal investment criteria will be applied in evaluating these opportunities.

 

Arbitrage trading
In addition to the private equity investments, Activa is also pursuing value based listed trading opportunities focusing on medium term hedged arbitrage opportunities.


Value based opportunities are identified with reference to the Net Asset Value or the sum-of-the-parts / intrinsic value of the investments. Investment (market or industry specific) risks are managed by means of hedging strategies where possible. Arbitrage trading is executed where: (a) glaring differences exist between the value of a holding company and its underlying assets. In these instances a long / short strategy is followed to exploit such differences; and (b) there are short-term anomalies in the valuation of companies in the same industry with similar risk profiles. Such situations are being exploited through pair trades.


Many investors can’t participate in these opportunities due to the technical nature involved to structure and implement these trades which include the short selling of shares (borrowing of script etc.). The principals have extensive experience and a successful track record in identifying and participating in these listed investment opportunities. The net long positions of these trades are generally relatively low due the cashflow benefits of the hedging strategies followed.


Most of these trades will have a medium-term investment horizon.

 

BEE opportunities
BEE transactions remain a very active sphere and will be for some time to come. The Activa principals have close relationships with pre-eminent BEE parties. Our philosophy is to partner with trusted BEE entities in underlying transactions and to assist investee companies in forming appropriate consortia, reflecting their specific operational requirements while maximising BEE ownership credits.

 

The focus will be twofold, pursuing: (a) primary BEE transactions, through participating as part of the BEE investor consortium where an attractive discount to the fair value of the target investment is applicable. The level of discount should be sufficient to compensate investors for factors such as, complexity of structures and transactions in general, as well as lack of control and liquidity. However, structures could be designed to offer non-BEE participants opportunities to exit prior to expiry of lock-up periods; and (b) secondary BEE transactions, where it is possible to design derivatives allowing current BEE shareholders with significant Net Asset Values to realise cash prior to the expiry of lock-up periods. Profits can be realised and fixed at the outset by applying appropriated hedging strategies.
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