Hedge fund manager banks R100m on Abil

Hedge fund manager banks R100m on Abil

2014-08-13 23:43

Cape Town - Every cloud truly has a silver lining as the R100m profit a local hedge fund manager made off the demise of African Bank Investments [JSE:ABL] (Abil) over the last few days showed.

36One’s Jean Pierre Verster told Biznews's Alec Hogg in an interview this week that his hedge fund took a bold move to “short” Abil – and banked R100m profit for clients as a result.

Verster said some people thought it was a “perverse incentive to see African Bank fail, but I don’t think we take any pleasure in this because there are real world implications, people losing their jobs for instance but yes, we’ve done well for our clients.”

He said 36One – the largest hedge fun in South Africa, with more than R4bn as a single hedge fund and more than R8bn through all its hedge funds – had between 1% and 2% short in African Bank. “That means we made 100% profit on that, and that comes to a round R100m, so it’s a nice number for our clients and we take performance fees off that number.”

Normally, Verster said, hedge funds don’t disclose how much money they make, but he wanted to tell people that they can’t retire. “It sounds like a lot, but in the context of our funds, it is 1%, so we made more in the last two years on Naspers [JSE:NPN] doing well than we did on African Bank failing.”

Unlike the 2008 crisis, Verster said no one could say that 36One’s shorting of this stock caused or was in anyway a reason for African Bank's failing.

It was variance perception that helped 36One have the foresight to see what was coming with Abil. “We saw the same facts, but we had a different perception,” he said. “We had a different interpretation of those facts, and what I think we saw are pieces of a puzzle, which gave us some confidence in thinking that there could be a scenario where African Bank fails.”

Listen to the interview:

One insight they had was the provisioning methodology of African Bank as well as Capitec [JSE:CPI]. “Capitec would see a loan as being non-performing, after one missed instalment,” he said. “Other big banks would see it as a non-performing after three months of missed instalments. African Bank saw it as a non-performing loan after five missed payments, so they were very, I would say, they were less conservative in their provisioning methodology.”

As a result of Abil, he said there would be some confidence implications for Capitec, “but we think they will be a net winner of the situation”.

CEO Leon Kirkinis's trait as being an optimist was dangerous in a changing environment, he said. “… in the context of a changing environment, new legislation, a strong growth period, which hides a lot of ills, one needs to be in touch with reality and through that over optimism …”

Verster said Abil also overpaid for the acquisition of Ellerine, a “business model that clearly was broken”.

Verster explained that the South African Bonds were not trading. “They are part of the suspension, similar to the Common Equity. Some money market funds and income funds have adjusted their evaluation or frozen that part of their portfolio, so some investors, when they request a redemption from an income fund of R100, might get R93 and R7 will be held behind, because that is the African Bank exposure. No one really knows the true value, but I would guess it would be close to 90% of the previous value.”

He said fund managers would not normally speak out about sensitive information, but this specific situation had allowed for insights into what happened.

In the whole reorganisation, there’s a good bank and a bad bank, said Verster. “The bad bank gets bought out of Abil at R7bn for R17bn loan book. That leads to an impairment of R10bn in the listed entity, so the listed entity is insolvent.

Read: Rescue plan for African Bank

“There is also a buy-out of the good book of R26bn from the listed entity into a good bank, so there’s an asset of 26. However, the debt holders also go long, which is 90% of R40bn of debt. That is R36bn, so you have 26 of loan book and 36 of the liability. That leaves a 10% funding shortfall. That’s where the consortium of banks are coming in.”

“The banks will want to exit because they are not in the business of owning stakes in other banks,” he said. “The good bank will then list and allow that consortium to be replaced as the shareholder, by public shareholders, so there’s quite a process still to come.  In that whole process there is some value attached to the current Abil shares …”

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  • Ike Jakson - 2014-08-14 00:01

    And he is actually proud of himself; it beats the wry hell out of me.

      Ike Jakson - 2014-08-14 01:48

      No Heinrich, not on this one. I have a problem with people that deny the accumulation of wealth by the entrepreneur; he puts his own money and what he can borrow from the bank, signs his house and everything he owns as security, creates employment; and deserves a million a day in my mind. But this guy is no better than a parasite; please don’t expect me to believe that he will donate the largesse to his clients; his type doesn’t do that. This is self enrichment in its most obscene way. And don’t forget, that kind of profit means a similar total loss to someone else. There is no win=win situation here. I condemn this sort of abuse in the strongest possible language.

      Sbu Sithole - 2014-08-14 08:16

      Ike, What are you talking about? By your logic anyone who buys something for less than market value and sells it again for a profit is a parasite. Going short is just a bet that the value of the stock will depreciate instead of appreciate. It does not contribute to the devaluation it's self. If you borrow money from the bank to buy a car for less than market value and then flip it pay back the bank and walk away with a profit, ask yourself where that money you made comes from.

      Ike Jakson - 2014-08-14 08:31

      Sibu, you are twisting my words. My point is that he was not using his own money; it makes a massive difference if you use other peoples' money.

      JimGordon - 2014-08-14 08:58

      Ike, if Abil management did their jobs properly Verster would have lost his shirt. He invested negatively against Kirkinis, and as we now know, Verster was right.

      Grant Olivier - 2014-08-14 09:17

      Rather call him a predator that cleans the investment ecosystem of the weak and the dead business models. There may be some purpose and honour in that. Then take a look at the exploiting and entrapping lending practices of ABIL and ask yourself who is the parasite in this picture. These entrepreneurs and shareholders are arguably not that virtuous.

      Hannelie van Heerden - 2014-08-14 09:23

      I should say he can be very proud. The fact is - ABIL failed because of reckless lending and bad management. Clearly there's some people like Mr Verster who can see stupid for what it is. Look at the pathetic apology by Coronation - '..humbling, so sorry we lost money for our clients, blah, blah...'. This young man knows what he is doing.

      Deon Louw - 2014-08-14 10:12

      He is making money for his clients, what is wrong with that? Nothing. He is after all not stealing the profits like some of our polititians are doing with our tax money.

      John Williamsii - 2014-08-14 11:14

      As an entrepreneur you need to understand market theory, this man has done 100% well. I am a self-made entrepreneur, I understand speculation, trade, finance, how can you call yourself an entrepreneur and have missed supply and demand theory?

      Maxil Travianus - 2014-08-14 12:04

      Ike, you come across as someone with EXTREME sour grapes, or very uneducated. The company is paid to invest money. Which they (like others) do very well. They (again like others) made money for their clients on the ABL. Why all the hate?

      Ike Jakson - 2014-08-14 13:41

      Maxil, I can’t tell you what you have to think but you are wrong on both counts in your view of who/what I am. Let us keep this nice and civil.

  • emile.mouton.39 - 2014-08-14 06:05

    He saw what ABIL directors and managers chose to ignore, the reality. And profited from that. What should bother anyone is the negligence displayed by ABIL. This situation was the doing of people still employed by ABIL. I have not seen any remorse from the directors for costing shareholders massive losses.

  • Ike Jakson - 2014-08-14 07:49

    It was easy for this man because he was using other peoples’ money, and he is getting free publicity which he obviously craves. He is no more holy or stupid than the PIC but knows he can’t loose even if other investors do. It is by no means a foregone conclusion that Abil will close doors. I remember the Saambou/Fedsure debacle of some 15 years ago; they were all in it and gleefully divided the spoils amongst them; then pushed it all under the carpet. It worked and the story was killed with silence. There will be major gains by some, AND MORE LOSSES BY THE GULLIBLE PUBLIC when they pull Abil up from the ditch. I sure hope the curators will look into all of it when the time comes.

      Hashiem Bardien - 2014-08-14 08:51

      I agree with Ike - what is the difference with "shorting" versus "gambling". This is the problem with current global economic models - money can be made from other's demise. There should only be one moral way to make money i.e. Provide a service or a product - that way you worked for your money, not betting or gambling that someone else made a mistake. Lastly, we as tax payers are the ones who eventually pay for the R100 million profit - where do you think the bale-out money is coming from?

      Ike Jakson - 2014-08-14 10:07

      Thank you Hashiem.

  • Lindokuhle Malindoza - 2014-08-14 09:00

    Well done to Mr Verster I do hope his portfolio is well diversified though as this sounds more of a speculation than a hedge to me. Playing derivatives instruments can indeed be very rewarding, but could also have very devastating implications. Hope the investors are aware of the risk they exposed to with these type of transactions.

      Adriaan Olivier - 2014-08-14 13:51

      Anyone who knows anything about investments knows that hedge funds are aggressively managed and carry high risk (and in many cases, like this, high reward), so the investors in this specific fund are very aware of the risk.

  • James N Catherine Coackley - 2014-08-14 09:33

    So maybe Mr Verster can prop up AFrican bank by a few million rands so that the rest of us suckers do not have to through are friendly SA banks.

  • Palu Jon - 2014-08-14 09:35

    This article is nothing more than an advert for 36One!!! R4/R8bn is tiny relative to other financial organisations!!! Mr Verster is plain and simply looking for other people to invest in is hedge fund!!! As the saying goes - one swallow does not summer make!!!

  • Dilip Patel - 2014-08-14 09:50

    He is my MAN, only if he can make another R 100 million in the next five years.

  • Joseph Tettey - 2014-08-14 10:41

    The horses won and the Real Economy suffers.The Tax payer eventually will be the looser whilst those who watch the screen will claim High IQ and go on buying spree.God Bless speculators.

      Ike Jakson - 2014-08-14 11:01

      Right Joseph.

  • Ike Jakson - 2014-08-14 11:00

    It has been good to see all the comments in a spirit of live and let live; good debating too. I am a bit off politics and strikers right now. Thank you all. We shall know more about this matter when the jury comes in with the verdict.

  • Cassim Rayhaan - 2014-08-15 07:56

    African bank senior management should have taken him seriously...since he explained himself in detail why he thought it was heading down.....long before the big down happened...well spotted jean pierre

  • Chad Daniel Bushnell - 2014-08-17 12:42

    Do NOT be fooled by JP nor 36One...1) They held HUGE positions in Sanyati where they lost many millions...2) They hold a HUGE position in Pinnacle (More than 6%) which we all know looks to be in big trouble...3) They also have a speculative position in Ellies....Conclusion? You want to look like a "hero" by making R100m off one trade? Well i think you better make sure your whole operation has a clean slate, because once you put yourself in the spotlight, you are only as good as your last trade...and the truth will come out eventually to bite them. Also, this whole "Abil is going to 0, we will buy our short back off market for 5c if people want to sell to us" just shows how big their ego is. This is NOT about making money anymore, this is a pure marketing strategy and and ego boost for them. If you go and short a stock at R20, and it goes all the way down to 31c, but you still say "its going to 0", you are not in any way trying to just make more money, but making a name for yourself. Want to know what the funny thing is? Even thou Abil is suspended on the local exchange at 31c, it still trades as an ADR in the states. Last Friday it closed in the states at just over 40c (In Rand terms), and closed this weeks trade at just over R2 (Yes R2!)...So clearly there is something good coming from this curation that will reward shareholders that bought under R1.

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