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THE DESPERATE attempt by Pretoria-based financial services business StratCorp to distance itself from its not-so-sound venture capital roots is turning into a bit of a nightmare. To erase its venture capital legacy - which included promoting disastrous investments in projects such as APMI, Supertow and Mobile Events Marketing - StratCorp needed to prove its ability as a purveyor of mainstream investments.
For a business based mainly on drawing monthly investments from mainly black clients, StratCorp's flagship "fund" - StratEquity Empowerment Investments (StratEmp) - needed a compelling asset management proposition to ensure debit orders flowed strongly. Unfortunately, StratEmp hasn't been the most scintillating investment scheme and - unlike most general equity unit trusts - appears not to have recovered convincingly from the recent market crunch.
The value for StratEmp is currently sitting at around 68c/share, more than 30% down on the 100c to 105c price range when the fund was launched in early 2008.The relative underperformance is perhaps understandable, considering StratEmp has retained cash holdings equivalent to 22% of the portfolio.
But the truth is that StratEmp really suffered due to an awful investment in meat company Best Cut Holdings - a wayward investment that, along with smaller punts in StratCorp (oh yes!) and African Dawn, has ripped the portfolio's value. Best Cut, which was suspended on the JSE last week pending a liquidation application, at one stage accounted for around 35% of StratEmp's value.
At the time of going to press the latest StratEmp value acknowledged that Best Cut's suspension shaved around 7c/share off the portfolio value - a fairly hefty blow to the empowerment investors looking to recover some lost value on more buoyant market conditions in 2009. The sad truth is the Best Cut investment has cost StratEmp plenty.
Basically, StratEmp subscribed for 12,9m shares in Best Cut ahead of its listing in early 2008 and then in April that year bought another 16,25m shares from Best Cut executive Thomas Hill at 80c/share. With Best Cut suspended in lieu of liquidation proceedings, we can only speculate how much of the R23m invested by StratEmp in the meat group will ever be recovered.
Though the damage to StratEmp's empowerment value is one thing, far more serious is the reputational damage StratCorp will suffer.
StratCorp's recent interim results showed StratEquity's subscription client base had already decreased 7,5%, from 43 528 to 40 271. Quite possibly, news of Best Cut's predicament could further staunch investment inflows.
Adding to StratCorp's woes is the recent confirmation of an insider trading probe into share dealings by directors. That, Finweek believes, relates to late February 2009 share sales by directors of around 8,6m shares at 48c - an exercise that netted StratCorp CEO David Harington a cool R3,7m. Somehow Harington managed to offload around 1m shares at 72c and another 6m shares at 48c - trading levels well above the current share price of between 15c and 20c.
The sales were timed just ahead of the end of StratCorp's 2009 financial year, a period in which it fared so badly that R27,5m of fresh capital was raised from empowerment investors.
Naturally, the sale of shares by directors at a time when empowerment investors were being asked to donate fresh capital is highly suspicious. It would be interesting to know who bought the directors' shares. Finweek wonders whether the directors' shares were conveniently offloaded to investors or clients on the books of StratEquity?
