UIF and Compensation Fund have lost hundreds of millions through risky investments

“Absolutely reckless” use of monies belonging to employees and workers in SA has seen the Unemployment Insurance Fund (UIF) and the Compensation Fund lose hundreds of millions through high-risk investments in unlisted companies

The funds need to be “saved from total collapse”, warns Sonja Boshoff, chair of the Select Committee on Economic Development and Trade.

Boshoff listed three specific investments that resulted in the UIF making losses:

• A R250 million investment in Musa Capital in 2018, which she claims is worth “absolutely nothing” today;
• A R20 million investment in Fountain Civil Engineering in 2015, with 65% of the value of this investment lost; and
• A R2 million investment in Zamalwandle Transport Logistics in 2021, which today is also worthless.

“I cannot understand why we [they] keep on investing and investing and there is no return on our investment.

“This is absolutely reckless because these monies belong to the employees of this country and the workers have absolutely no say where their monies are invested, which is also a very non-transparent practise from this department [Department of Employment and Labour],” she said.

The investments by the UIF and Compensation Fund are managed by the Public Investment Corporation (PIC) based on the investment mandate given to the PIC by these entities.

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Tip of the iceberg?

Boshoff apologised for being unable to provide more information about the non-performing investments by these two entities and indicated that she had picked the information she has about these unlisted investments from previous reports.

“If I am going to scratch more, I’m going to find more,” she added.

“There must be much, much more incorrectly invested … [which does not] bode well for any of the other investments and we know that [the] PIC is problematic when it comes to investing on behalf of departments.

“The picture that has been painted is dismal because if you have invested R250 million in the year 2018 and you have nothing to show for it, why has nobody in the department spoken about it?” she said.

She said she has submitted written questions to the department about the listed and unlisted investments but the department has tried to evade providing answers.

Boshoff added that to prevent the UIF and Compensation Fund from collapsing totally, there needs to be consequence management “if wrongdoings are found”.

She said another problem is the many vacancies in the department, with it having an acting director-general, acting chief financial officer and “an acting this and an acting that”, which means there is no continuity if someone resigns or is suspended.

Boshoff said that in contrast to the reports and presentations by the department on these two entities, the Auditor-General reports say “nothing good” about them.

Comment was requested from the Department of Employment and Labour but a response has not yet been received.

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Negative return for UIF since inception

A quarterly review of the UIF’s investment portfolio published in August 2023, the most recent review that could be traced, said that since its inception, the internal rates of return (IRR) of the UIF has been a negative 5.12% due to several developmental or impact investments in the fund’s unlisted portfolio underperforming or being in distress.

Investment committee chair Ogalaletseng Gaarekwe said these are historic investments dating back as far as 2015.

Gaarekwe said there has not been any new investment by the PIC on behalf of the UIF in socially responsible investments (SRI) or unlisted investments since 2019.

He said many of these investments were the subject of the investigation by the Mpati Commission of Inquiry into allegations of impropriety at the PIC and require remedial actions or steps to legally recover assets.

“The Investment Committee is satisfied with the work, and regular reporting done by a team of turn-around and value-add (TOVA) specialists employed by the PIC to analyse and monitor these investments.

“Of the 12 unlisted investee companies in distress, three are in liquidation, whilst another three have been placed in business rescue,” he said.

“A further two are under legal dispute and the remaining four are being restructured and turned around.”

PIC spokesperson Adrian Lackay said the total assets under management (AuM) for the UIF grew by 12% to R16 billion in the year to end-March 2024, with the UIF’s portfolio delivering returns of 7.2% during the year, while the AuM of the Compensation Fund grew by 8.4% to R4.6 billion.

Lackay said the PIC has not made any new investments in the unlisted investment space for more than three years since clients put a moratorium on the SRI investments and, as such, no new capital has been invested.

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Not reckless, just ‘risky’

“Underperforming investments are not an indication of the PIC’s investment activities being ‘reckless’ but largely due to the risky nature of investment where positive outcomes/returns are not guaranteed, especially when there are significant changes in the investment environment such as the Covid-19 pandemic,” said Lackay.

“Where underperformance was due to internal shortcomings, the PIC has implemented strict governance controls and improved its investment and risk management processes,” he said.

Lackay said the PIC executive was strengthened by the appointment of the chief investment officer, chief risk officer, chief operating officer and chief technology officer.

He said the PIC has also implemented 242 of the 243 recommendations of the Mpati Commission that are within its control, including remedial actions where the commission expressed concern over historic transactions.

“Most of the impairments relate to transactions concluded over the period 2014 to 2016,” he said.

“The are no significant new impairments in the unlisted portfolio over the last three years.”

Lackay added that for the UIF portfolio, the PIC provided the necessary R64 billion liquidity to fund the Temporary Employee/Employer Relief Scheme (Ters) during the Covid-19 pandemic.

He stressed that the PIC’s investment decisions are guided by the mandates of clients, with the investment process focused first on achieving financial returns and secondly in improving societal benefits.

“All investments undergo rigorous internal assessments and due diligence as part of the PIC’s governance processes, including analysis, consideration and approval by the appropriate governance structures.

“The IRR is 6.07% for the unlisted investments annualised over three years, which compares very favourably given its developmental nature and correlation to the macroeconomic environment,” he said.

This article was republished from Moneyweb. Read the original here.