How a R9.4bn loan for a stake in Steinhoff went through without the PIC board’s approval

The investment processes followed by the Public Investment Corporation (PIC) have again come under scrutiny, this time prompted by the state asset manager’s loan to Steinhoff International’s empowerment partner, the Lancaster Group, the amount of which was reduced in order to bypass board approval.

The judicial inquiry probing issues of impropriety at the PIC heard on Tuesday that in July 2016 Lancaster, led by former trade unionist Jayendra Naidoo, had initially approached the PIC for a R10.4 billion loan in order to purchase a 3% stake in Steinhoff.

When the final transaction was concluded, R1 billion had been shaved off the original amount. Lancaster was awarded R9.4 billion, which went towards transaction fees and the purchase of a 2.75% stake in the company.

“I can only speculate,” said the PIC’s Vusumuzi Raseroka (fund manager for private equity and structured investment products), “that the reduction was to enable the transaction to fall within the mandate limit of the investment committee, in terms of the specific product category, which, if exceeded, would have resulted in the transaction requiring full approval from the PIC board.”

Faster approvals

All transactions above R10 billion need to go to the PIC’s board for approval while those that fall below this threshold can be concluded at investment committee level. Going through the board would have delayed the approval of the transaction, and Lancaster would not have been able to buy Steinhoff’s shares because the company was approaching a closed period starting in August.

Raseroka assured the commission on Tuesday that PIC processes were not flouted and that there was nothing untoward about the move to reduce the loan amount.

“It happens,” he said.

But commission assistant Gill Marcus was not satisfied with this explanation and asked for the inquiry’s investigation team to review how many transactions above R10 billion had been presented to the full PIC board in the last three years.

“The question is not about whether it is sinister, it is about whether due process and governance is followed,” said Marcus.

The commission’s terms of reference include assessing the governance structures of the PIC and making recommendations about the investment decision-making framework and the delegation of authority.

Common practice?

“If it is common practice to ensure that all your decisions are [for loan applications] below R10 billion, [then] in terms of the terms of reference of this commission, it becomes a governance issue,” said Marcus.

She described such a practice as a “decision” to bypass the delegation of authority and good governance in the PIC, and could be interpreted that way if it happened often.

Raseroka agreed but could not say whether it happened regularly, testifying that he only had insight into the transactions he worked on.

The PIC’s investments have come under the microscope at the commission where, on more than one occasion, witnesses have cited time pressures as an excuse for not applying rigorous governance and investment processes in transactions.

The state asset manager invests money on behalf of the Government Employees Pension Fund and other social funds, with assets amounting to over R2 trillion.

PIC investment associate Botsang Morobe, who also testified on Tuesday, said that within a year of granting the loan so Lancaster could acquire a 2.75% stake in Steinhoff – also known as Project Sierra – the company’s share price started declining. This affected the PIC’s security package as it had hedged the investment with a collar option.

Lancaster’s Naidoo approached the PIC with a proposal to restructure the agreement, where the state asset manager would buy an 11.8% shareholding in Steinhoff Africa Retail, now known as Pepkor. These shares would then be pledged to the PIC, which would offer it a more enhanced security package. The acquisition was made through the companies that formed part of the empowerment vehicle, Lancaster 101 and Lancaster 102, in which the PIC holds a 50% stake.

Project Blue Buck

In order to buy Pepkor’s shares, the PIC had to cede the security option that protected it from a decline in the value of Steinhoff’s shares to Citibank in exchange for a loan. This was called Project Blue Buck.

Project Blue Buck was completed ahead of Steinhoff’s collapse in December 2017 when the company’s auditors refused to sign its financials because of “accounting irregularities” leaving the PIC completely unprotected with an impairment of R4.3-billion on its R9.35 billion investment.

Morobe said the impairment would have been wider had the PIC not restructured the agreement and remained with Project Sierra.

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