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The Proposed Amendments To The Partnership Agreement, Constituting A Related Party Transactions
AFRICAN RAINBOW CAPITAL INVESTMENTS LIMITED
(Incorporated in the Republic of Mauritius)
(Company number: C148430)
JSE and A2X share code: AIL
ISIN: MU0553S00000
("ARC Investments")
ANNOUNCEMENT REGARDING THE PROPOSED AMENDMENTS TO THE PARTNERSHIP
AGREEMENT, CONSTITUTING A RELATED PARTY TRANSACTIONS BETWEEN ARC
INVESTMENTS AND UBI GENERAL PARTNER PROPRIETARY LIMITED AND CAUTIONARY
ANNOUNCEMENT
1. Introduction
Shareholders are advised that ARC Investments has, on 29 September 2022, entered into an
addendum amending certain provisions ("Addendum") of the partnership agreement
establishing the ARC Fund ("Partnership Agreement"). The Partnership Agreement was
initially concluded on 22 August 2017 between ARC Investments and UBI General Partner
Proprietary Limited in its capacity as General Partner of the ARC Fund ("General Partner").
The Addendum revises the provisions of the Partnership Agreement related to the half yearly
management fees ("Management Fees") charged by the General Partner and is part of
several proposed changes to the fees charged for the overall management of the ARC Fund.
2. Background to the Addendum and other proposed amendments to the fee structures
charged to the ARC Fund ("Proposed Amendments")
2.1 Current Management Fee structure
In terms of the Partnership Agreement, the General Partner charges the ARC Fund a
Management Fee, half yearly in arrears in respect of the periods ending on 30 June and
31 December each year ("Half Year") based on the value of the investments reflected
at the beginning of the relevant Half Year ("Opening Invested NAV"). The fee scale is
as follows:
2.1.1 if the Opening Invested NAV is below R10 billion, then 1.75% per annum on the
average of the Opening Invested NAV and the net asset value on the last
business day of the relevant Half Year ("Closing Invested NAV") of that Half
Year;
2.1.2 if Opening Invested NAV is between R10 billion and R15 billion, the higher of the
amount determined in paragraph 2.1.1 above and 1.5% of the average of the
Opening Invested NAV and the Closing Invested NAV of that Half Year;
2.1.3 if the Opening Invested NAV is above R15 billion, 1.25% on the average of the
Opening Invested NAV and Closing Invested NAV of that Half Year; plus
2.1.4 a cash management fee of 0.25% per annum on average of the opening and
closing balance of the Cash Management Investments of that Half Year,
reduced by any Creditable Fees (as defined in the Partnership Agreement) for the
previous Half Year, in each case determined as at the beginning and end of the relevant
Half Year, provided that in no event shall the fee payable to the General Partner be less
than zero.
2.2 Current Investment Services Fee
In terms of the investment services agreement ("Investment Services Agreement")
concluded between UBI and African Rainbow Capital Proprietary Limited ("ARC"), ARC
charges the General Partner an investment services fee of 95% of the Management
Fee ("Services Fee") for the administration and investment services functions it
performs on behalf of the General Partner.
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2.3 Current Performance Participation
The constitution of ARC Investments ("Constitution") provides for a performance
participation fee to be paid to the holder of the C shares in ARC Investments ("C
Shares") at the end of each financial year of ARC Investments ("Performance
Participation"). The terms of the C Shares contain the current Performance
Participation arrangement.
As set out in the terms of the C Shares, the Performance Participation is currently
calculated on an annual basis on the growth in the net asset value of the ARC Fund's
investments ("Invested NAV"), subject to such growth exceeding 10% per annum,
compounded annually, as follows:
Performance Participation = [ Growth in Invested NAV ] x 16%
provided that in no event shall:
- the Performance Participation be less than zero; and
- the Performance Participation result in the "Adjusted Growth in Invested
NAV%" (as defined in the terms of the C Shares)" decreasing below the
Performance Hurdle. If the Performance Participation does result in the
Adjusted Growth in Invested NAV% decreasing below the Performance
Hurdle, then the Performance Participation will be reduced to such amount
as will result in the Adjusted Growth in Invested NAV% being equal to the
Performance Hurdle.
2.4 Proposed Amendments
2.4.1 Partnership Agreement: Management Fee
It is proposed that the Management Fee charged by the General Partner to the
ARC Fund will be amended to an amount which is expected to be significantly
lower than the current Management Fee, and which can never be higher than the
current Management Fee. The amended Management Fee will be calculated as
the lower of:
2.4.1.1 the fee that would have applied had the current method of calculating the
Management Fee as set out in paragraph 3.1 continued to be applied; and
2.4.1.2 the actual cost of managing the ARC Fund, including the Services Fee
charged by ARC and other direct costs incurred by the General Partner,
plus a 5% mark-up thereon (excluding VAT),
in either such case reduced by any Creditable Fees received by the General
Partner or any of its associates (including ARC) during the relevant Half Year;
provided that in no event shall the amended Management Fee be less than zero.
2.4.2 Investment Services Agreement: Service Fee
It is proposed that the new Service Fee will be a proportionate share of the actual
costs incurred by Ubuntu-Botho Investments Proprietary Limited ("UBI") and its
direct and indirectly held entities that relate to the management and
administration of the UBI Entities (as defined below) including the ARC Fund).
The costs of managing and administering the ARC Fund (in relation to the costs
of managing and administering the UBI group as whole) will be determined on
the following basis:
• Costs directly attributable to the limited partnership between ARC
Investments and the General Partner ("Partnership"), the General
Partner, African Rainbow Capital Financial Services Holdings Proprietary
Limited and ARC Financial Services Investments Proprietary Limited
(collectively, the "UBI Entities") will be allocated to the Partnership or such
other UBI Entity, as applicable.
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• Costs relating to more than one UBI Entity will be attributable to those UBI
Entities in proportions determined with regard to time spent by relevant UBI
Group personnel on work relating to the UBI Entities concerned, and other
relevant criteria.
• In the case of costs relating to African Rainbow Capital Financial Services
Holdings Proprietary Limited and ARC Financial Services Investments
Proprietary Limited and their direct and indirect subsidiaries, only that
proportion of those costs which equals the proportionate direct or indirect,
as the case may be, interest of the Partnership in the relevant UBI Entity
will be allocated to the Partnership.
• After the end of each Half Year, ARC shall calculate and submit to the
General Partner for its approval the costs attributable to the Partnership for
that Half Year (and consequently its calculation of the amount of the
Service Fee for that Half Year), and shall, following receipt of written
approval thereof from the General Partner, issue an invoice for the
Service Fee to the General Partner.
• At the same time as ARC submits to the General Partner its calculation of
the amount of the Service Fee for a Half Year, ARC shall also calculate
and submit to the General Partner for its approval the Creditable Fees (as
defined in the Partnership Agreement) in respect of that Half Year to enable
the General Partner to calculate the Management Fee for that Half Year,
in accordance with clause 6 of the Partnership Agreement.
2.4.3 C Shares: Performance Participation
The main proposed amendment to the Performance Participation is to calculate
the Performance Participation on the outperformance of NAV growth (rather than
growth in Invested NAV) above the Performance Hurdle, instead of on (all) the
Growth in Invested NAV. This will result in the Performance Participation being
calculated with reference to the return on investments of the ARC Fund based on
the total NAV of the ARC Fund (not just the Invested NAV). The return will therefore
be calculated on the total NAV, including cash balances and the Performance
Participation will only apply to returns above the Performance Hurdle.
Full details of the Proposed Amendments will be set out in the Circular to be issued to
Shareholders.
2.5 Rationale for the proposed amendments
The board of the General Partner has proposed to amend the current Management Fee
and Service Fee arrangements and the terms of the Performance Participation for, inter
alia, the following reasons:
2.5.1 the shares trade at a discount to the NAV per share of the underlying investments
in the ARC Fund. The investment committee of the General Partner, based on
discussions with Shareholders and other market participants, believes that one of
the reasons for the discount is the current Management Fee and Performance
Participation arrangements, which are considered to be out of line with respect to
best practice for listed entities;
2.5.2 the actual costs incurred by ARC for the investment and administration services
which it provides to the General Partner are less than the current Services Fee
charged by ARC to the General Partner; and
2.5.3 the current calculation of the Performance Participation (on the Invested NAV
rather than on NAV of the ARC Fund) excludes cash and debt balances and is
silent on the treatment of other income earned by the ARC Fund, including
dividends paid by the various investments, which should be included in
determining the investment returns.
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2.6 Effective Date
Subject to the approval by Shareholders of the Addendum and the amendments to the
terms of the C Shares, each of the Proposed Amendments will become effective
retrospectively from 1 July 2022.
2.7 Shareholder approval required
In order for the Addendum to become effective and for the changes to the terms of the
C Shares to take effect, shareholders will be required to approve the Addendum and
the amendments to the C Shares at a general meeting of shareholders.
3. Related party transaction implications of the proposed amendments and amendments
to the Constitution
Paragraph 10.1 of the JSE Listings Requirements provides that a "transaction" includes "any
variation or novation of an existing agreement between an issuer … and a related party".
The Proposed Amendments to the Management Fee will require amendments to the
Partnership Agreement. As the General Partner is a related party of ARC Investments by virtue
of the General Partner being an associate (as defined in the JSE Listings Requirements) of
ARC Investments' ultimate controlling shareholder, UBI, and the Proposed Amendments will
result in a "variation" of the existing Partnership Agreement, the Proposed Amendments
constitute a related party transaction between ARC Investments and the General Partner.
The Performance Participation is contained in the terms of the C Shares and, accordingly,
amendments to the terms of the C Shares constitute an amendment to the Constitution. The
Proposed Amendments to the terms of the C Shares and the resultant amendments to the
Constitution do not constitute a related party transaction and are therefore not subject to the
requirements of section 10 of the JSE Listings Requirements.
Accordingly, a circular, including notice of a shareholders meeting, will be distributed to
shareholders in order for shareholders to consider, and if deemed appropriate, approve:
3.1 the Proposed Amendments to the Partnership Agreement for purposes of section 10 of
the JSE Listings Requirements; and
3.2 the amendments to the Constitution (as constituted by the amendments proposed to
the Performance Participation contained in the terms of the C Shares) as required by
articles 1.3.2 and 4.1.8 of the Constitution and sections 44(2) and 114 of the Mauritian
Companies Act.
UBI, as the sole shareholder of the General Partner and its associates (as defined in the JSE
Listings Requirements) will not vote any of their shares in respect of the resolution to be
proposed regarding the amendments proposed to the Management Fee and the Partnership
Agreement, as those amendments constitute a related party transaction. However, UBI will be
taken into account for the purposes of determining the quorum for that resolution. UBI, as the
sole holder of the C Shares, will vote in respect of the amendments which are proposed to the
Performance Participation, which amendments constitute amendments to the terms of the C
Shares contained in the Constitution, as those amendments do not constitute a related party
transaction. UBI will also vote in respect of the separate class vote of the holder of the C
Shares to approve the variation in the rights of the C Shares.
The amendments proposed to the Investment Services Agreement do not constitute a related
party transaction as they do not involve ARC Investments and accordingly, no shareholder
approval is required for these amendments from ARC Investments' shareholders.
4. Circular to shareholders
A circular, prepared in accordance with the requirements of section 10 of the JSE Listings
Requirements, will be distributed to shareholders in due course. The circular will incorporate
a notice of general meeting, including the resolutions to be put to shareholders at a general
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meeting, expected to be held on 15 November 2022, immediately following the conclusion of
the 5th annual general meeting of ARC Investments.
The circular will further contain a fairness opinion prepared by the independent expert, BDO
Services South Africa Proprietary Limited, the pro forma financial effects of the amendments
as well as the recommendation of the board of ARC Investments in respect of the Proposed
Amendments.
5. Cautionary
Shareholders are advised to exercise caution when trading in their ARC Investment shares
until the pro forma financial effects of the proposed amendments have been published.
By order of the Board
Ebène, Mauritius (with simultaneous circulation in Johannesburg)
30 September 2022
Transaction sponsor
Deloitte & Touche Sponsor Services Proprietary Limited
Legal advisor as to South African law
Webber Wentzel
Independent reporting accountant
PricewaterhouseCoopers Inc.
Independent Expert
BDO South Africa Services Proprietary Limited
Legal advisor as to Mauritian law
BLC Robert & Associates
Date: 30-09-2022 12:00:00
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