The sole beneficiary of the transaction, Jayendra Naidoo, splurged the money on a 3% stake in controversial company Steinhoff International, whose share price later collapsed amid allegations of fraud and corruption – costing the PIC almost R6bn.
According to PIC employee Botsang Morobe, the state asset manager funded the questionable deal for the benefit of Naidoo, the chairman of Lancaster 101, the entity used for the deal.
Morobe, employed by the PIC as an associate principal in Isibaya Private Equity and Structured Investment Products (Sips), made the revelations during her testimony before the Mpati Commission of Inquiry into allegations of wrong- doing at the PIC in Pretoria yesterday.
She added that the government asset manager also spent hundreds of millions of rand in transaction and advisory costs, ratio collar premiums and acquisition costs.
Morobe said the Lancaster 101 transaction, dubbed “Project Sierra” during the pitching process, was approved on August 5, 2016. The transaction was for the PIC to provide Lancaster Group with a loan for the acquisition of a 3% stake in Steinhoff International Holdings.
Steinhoff’s share price plummeted last year amid allegations of accounting fraud and corruption by senior bosses.
The Government Employees Pension Fund, represented by the PIC, lost R5.3bn when the Steinhoff share price lost value.
Morobe told Justice Lex Mpati, former president of the Supreme Court of Appeal, Gill Marcus and Emmanuel Lediga, that Naidoo’s deal required the PIC to meet timelines set by Steinhoff . She said she could not confirm how the transaction originated, and if there had been prior iterations of the investment proposal before her involvement.
“In May 2016, I was tasked to work on Project Sierra in my capacity as investment associate. I received a copy of an investment proposal prepared by Symphony Capital from Mervin Muller, acting executive head of Private Equity and SlPs at the time,” she said.
ENS was the legal adviser to Lancaster Group * , while DM5 served as legal advisers to the PIC. Symphony served as legal advisers to Lancaster Group, she added.
“The PIC has entered into a Global Market Security Lending Agreement with Citibank under which Citibank can borrow Steinhoff shares from the PIC to maintain the ratio. The stock loan could be made through intermediaries including Deutsche Bank,” she said.
Morobe said the investment committee approved the transaction although she was not present at the final committee meeting.
The approval was for the PIC to provide a loan of R9.3bn to Lancaster special purpose vehicle (SPV) – which was later registered as Lancaster 101 – for the acquisition of a 2.75% equity stake in Steinhoff, including transaction- related costs.
The ownership of Lancaster SPV would be 50% held by the Government Employees Pension Fund (GEPF), 25% by Lancaster Group and 25% by a B-BBEE group.
Lancaster SPV would be capitalised by GEPF and Lancaster Group through a contribution of R50m each.
The total costs for Project Sierra totalled more than R9.4bn, broken down as R9bn for the acquisition of shares, R100m for transaction costs and R350m for a ratio collar premium.
When asked what had happened with the transaction from a financial standpoint, Morobe said that there were a series of parameters that had to be overcome in the transaction.
“It was an empowerment transaction which facilitated the acquisition of a BEE partner into Steinhoff. The BEE partner was supposed to be active and facilitated by the shares. Mr Naidoo would have been part of the voting pool and part of the strategic direction of the company.
“There were also key performance indicators included, which spoke to social development and entrepreneurship initiatives. Has the sponsor got a return on investment as yet? The answer is no,” she said.
She concluded by stating that a lot of work still needed to be done and it was difficult to make an assessment based on the current standing of Steinhoff.
The commission also heard how Lancaster 101 lowered the value of its transaction from R10.4bn to R9.4bn so it would avoid going through the PIC board. This was revealed by PIC fund principal of Private Equity and Sips, Rampomane Raseroka, who said going through the board would have had the effect of lengthening the transaction timelines.
“I can only speculate that the reduction was to enable the transaction to fall within the mandated limit of the investment committee, in terms of the specific product category, which if exceeded would have resulted in the transaction needing to go to the full PIC board for approval.
“This would have precluded the trade on the portion of shares (43%) which were to be purchased from the Steinhoff affiliate from happening, as they would not be able to trade during a ‘closed period’,” said Raseroka.
Asked what the real issue was with the Lancaster transaction, Raseroka said the issue was mainly the provision of R9.4bn for a single person.
The commission questioned him about the practice of reducing the value of the transaction to avoid the board processes. In response, Raseroka said there really was nothing sinister about such practices when companies needed to work within certain time frames.
However, within a year of the PIC’s participation in Project Sierra, Steinhoff share price began to decline and this impacted the PlC’s security package.
BUSINESS REPORT / THE MERCURY