Author Topic: Fairfax Africa  (Read 21394 times)

Xerxes

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Re: Fairfax Africa
« Reply #70 on: July 12, 2020, 08:41:43 AM »
FWIW, I think FAH was earning maybe $20 million of interest annually. Though, I think much of it was paid in kind (or rolled into additional principle) in recent months. FAH had over $100 million of bonds, loans, and guarantees. Most earning double digit interest rates. (Much of the interest coming from ATMA.)

No doubt FAH’s Wilkerson has plenty of IQ. A Harvard MBA and a masters from Yale is ample evidence. I have a hunch his experience with CIG and ATMA will propel him to world-class turnaround expert status. And, I’m sure he is experiencing a lifetime’s worth of stress these days.

But, concentrating $500+ million into a falling knife bank holding company, a horrendously mismanaged infrastructure company, a startup education company, and a couple AGH spin offs was a terrible rookie mistake - fueled by impatience, lack of discipline, and unawareness of one’s circle of competence. (The blame can be shared by Wilkerson, FFH’s investment team, and FAH’s board.) The whole fiasco was a hope strategy that didn’t work out.


i don't know which extreme is worse:
- buying non profitable technology story companies (don't mean big tech) knowing that a greater fool will be buy it from you at a higher price and then the music stops, and you are left holding the bag
- worshipping at the alter of Deep Value; buying stuff 50 cent on the dollar and selling out at 25 cents on the dollar b/c the market forces your hand.

what's wrong with finding something in between these styles.

On Wilkerson, i was at the 2018 AGM in Toronto; seem like a nice guy. At the end of the Q&A session, two of the older gentlemen (who i believe were FFH shareholders from he crowd) give him a copy of what i believe was Buffet AGM letters in a book form. Hopefully he is reading those.
 


Thrifty3000

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Re: Fairfax Africa
« Reply #71 on: July 13, 2020, 11:02:16 AM »
Point is - there has to be a flexible and intelligent LONG TERM plan
If you had a $ today, to put into either a FAH or an ABX, where would you put it?

perhaps neither ABX nor FAH,
lets go with Jumia with a $600 million market cap. :-)
Fire and forget. See you in 2030.


i am not as knowledgeable as everybody else when it comes to FAH, but here some broad strokes from an average joe who has been watching the collapse of Fairfax Africa in slow motion; and lets call it what it is, a collapse:

- FFH with all its deep bench, simply didn't not have the needed overhead to support such a far flung operation. There is no shame into that. A lot of companies stay away from what they do not know. When was the last time, you saw a job opening on FFH looking for local talent in Africa to feed its investment vehicle.
- it is fine that FAH is permanent capital, therefore not exposed to the same pull as say PE would be when client start to pull in their money, before the investment plays out. But even permanent capital is not immune, when it is trading on the market as an investment vehicle and the message that it sends when the stock takes a massive hit. What was wrong planting these seeds in Africa as part of FFH (and I believe in Africa), rather a separate permanent capital vehicle.
- there was no reason for FFH to create FAH and FIH at the same time when it did. I understand FIH, given their historic exposure in India. They could have kept FAH within FFH for a while longer.
- i have said this in the FIH thread, the FIH/FAH needed to have some management fee stream that gives their respective management ammunition to deploy. in absence of that the only other two source of cash is either selling a crown jewel at the wrong time or issuing stock at the wrong time. i think issuing debt without having a cash inflow to pay the interest not feasible either.

FWIW, I think FAH was earning maybe $20 million of interest annually. Though, I think much of it was paid in kind (or rolled into additional principle) in recent months. FAH had over $100 million of bonds, loans, and guarantees. Most earning double digit interest rates. (Much of the interest coming from ATMA.)

I get the sense FFH’s buying back ATMA was a deal concession. I look at it as a $40 to $80 million dollar pot sweetener. Neither FFH nor Helios needed any more risky financials on their books - they both have plenty. And, you know ATMA is risky because Wilkerson is the chairman of ATMA’s board. Wilkerson has COMPLETE visibility into ATMA. I’m talking daily updates on loan losses/forbearance. If ATMA was a guaranteed success Wilkerson could have convinced Helios to take it. But, he didn’t, which means ATMA is a big question mark. I guarantee there are tons of bad debts piling up. And, the prognosis goes something like this... if energy demand, travel, and life in general return to normal in the next 6 to 12 months then ATMA will probably work out ok, but if it doesn’t then we’re probably impairing this sucker big time.

Remember, ATMA was already a red flag when it asked to defer interest payments back in December - even before Covid emerged as a threat.

No doubt FAH’s Wilkerson has plenty of IQ. A Harvard MBA and a masters from Yale is ample evidence. I have a hunch his experience with CIG and ATMA will propel him to world-class turnaround expert status. And, I’m sure he is experiencing a lifetime’s worth of stress these days.

But, concentrating $500+ million into a falling knife bank holding company, a horrendously mismanaged infrastructure company, a startup education company, and a couple AGH spin offs was a terrible rookie mistake - fueled by impatience, lack of discipline, and unawareness of one’s circle of competence. (The blame can be shared by Wilkerson, FFH’s investment team, and FAH’s board.) The whole fiasco was a hope strategy that didn’t work out.

From what I’ve gathered in a few hours of digging, Helios is much more in line with the type of investment manager you would expect of a partnership with a reputable billionaire like Prem. Being the largest, fastest growing, savviest Private Equity group in Africa comes with plenty of competitive advantages. (I’m intrigued by the little I’ve learned so far about their growth, telecom business, and dollar denominated credit operation.)

My gut says Helios got wind that Prem was looking for a new investment manager for FAH. I suspect Helios has plenty of investment opportunities that could thrive with more access to dollar bills. I suspect Helios was aware of FAH’s large cash position, and skillfully and compellingly made Prem aware of what Helios could do with a couple hundred million of extra US dollars (remember, Africa does not have access to the Federal Reserve’s dollar swap lines. There has been a run on dollars, and African business is a fish out of water without dollars.)

I suspect Helios said to Prem something along the lines of “if you not only give us control of FAH’s $140 million of cash & equivs, but also kick in an extra $40 mil while taking ATMA’s risk off the table, we already have the breadth of opportunities and knowledge (aka more ideas than capital) to immediately deploy US dollars so incredibly profitably that investing in Africa during its 40% off sale will feel even easier than investing in US equities in the 1970’s.”

Prem says “where do I sign the check?”

I do not know if you were on the call for AGM 2020 and heard Prem and Michael's comments when they were asked point blank if there is any stress in any of the businesses including ATMA or CIG...their response was basically that their internal tests indicated that businesses will be able to manage on their own apart from the 40mil to ATMA . Prem called the share price at 3$ an absolute joke .

They basically cannot sell at ATMA for 40 mil to a related party without marketing the business independently to the market. UBN stake alone could have easily fetched 80-100mil .

I hear what you're saying on ATMA. I think if the ATMA transaction was done in isolation (not as part of a broader deal with Helios), without additional explanation, it would raise red flags - and maybe even spark some legal activity.

But, it's clearly a deal concession. Fairfax and Helios both well know the importance of speed when it comes to doing deals.

I suspect that during the diligence process Helios couldn't pinpoint the value of ATMA (especially with recent devaluations, and with so much of the equity stakes collateralizing debt). Helios probably considered selling it post-transaction, and realized it could be a nightmare, especially since the recent deal had collapsed. I have a hunch Helios had conversations with the parties involved in the prior deal that fell through (I feel like Fairfax would allow those types of discussions), and probably with other potential buyers, none of which alleviated concerns related to ATMA.

My guess is Helios raised ATMA as a deal breaker. Fairfax wanted to salvage the deal, had to think quickly, probably considered multiple solutions, and proposed taking most of the ATMA risk off the balance sheet by buying it at ATMA's public market value. There were alternative solutions;

- Fairfax could have offered to infuse more cash by buying more shares of FAH at around $3.00 per share
- they could have offered to loan FAH money
- they could have offered Helios more equity in the deal, etc.

I think Fairfax recognized the value of a partnership with Helios, knew they needed a quick solution specific to ATMA, and probably did the right thing to salvage the deal.

I think this deal de-risks FAH big time. I think it's win win for Fairfax and Helios.

I think Helios will leverage this relationship to launch a few $3 to $5 billion funds over the next decade, which will gush cash into the new FAH (Helios Fairfax Partners - HFP). I think HFP will provide a lot of visibility into how Helios performs, which will be reviewed by potential investors in their PE deals, so Helios will have plenty of incentive to assure HFP performs very well.

Assuming Helios can continue drumming up value in Africa for years to come this deal should create a virtuous cycle for HFP owners and for Helios's partners.

If it turns out Helios is more skilled at raising funds than investing profitably, then at some point HFP will languish. If that happens Fairfax still has control.

So, at the current price, over the next decade, I see this as landing somewhere between an investment that languishes (but, doesn't go to zero unless we see crazy leverage introduced), and maaaaybe a 10 bagger if Helios rides a wave of strong African economic growth, strong investment performance, and strong fund raising.

hobbit

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Re: Fairfax Africa
« Reply #72 on: July 13, 2020, 03:08:22 PM »
Point is - there has to be a flexible and intelligent LONG TERM plan
If you had a $ today, to put into either a FAH or an ABX, where would you put it?

perhaps neither ABX nor FAH,
lets go with Jumia with a $600 million market cap. :-)
Fire and forget. See you in 2030.


i am not as knowledgeable as everybody else when it comes to FAH, but here some broad strokes from an average joe who has been watching the collapse of Fairfax Africa in slow motion; and lets call it what it is, a collapse:

- FFH with all its deep bench, simply didn't not have the needed overhead to support such a far flung operation. There is no shame into that. A lot of companies stay away from what they do not know. When was the last time, you saw a job opening on FFH looking for local talent in Africa to feed its investment vehicle.
- it is fine that FAH is permanent capital, therefore not exposed to the same pull as say PE would be when client start to pull in their money, before the investment plays out. But even permanent capital is not immune, when it is trading on the market as an investment vehicle and the message that it sends when the stock takes a massive hit. What was wrong planting these seeds in Africa as part of FFH (and I believe in Africa), rather a separate permanent capital vehicle.
- there was no reason for FFH to create FAH and FIH at the same time when it did. I understand FIH, given their historic exposure in India. They could have kept FAH within FFH for a while longer.
- i have said this in the FIH thread, the FIH/FAH needed to have some management fee stream that gives their respective management ammunition to deploy. in absence of that the only other two source of cash is either selling a crown jewel at the wrong time or issuing stock at the wrong time. i think issuing debt without having a cash inflow to pay the interest not feasible either.

FWIW, I think FAH was earning maybe $20 million of interest annually. Though, I think much of it was paid in kind (or rolled into additional principle) in recent months. FAH had over $100 million of bonds, loans, and guarantees. Most earning double digit interest rates. (Much of the interest coming from ATMA.)

I get the sense FFH’s buying back ATMA was a deal concession. I look at it as a $40 to $80 million dollar pot sweetener. Neither FFH nor Helios needed any more risky financials on their books - they both have plenty. And, you know ATMA is risky because Wilkerson is the chairman of ATMA’s board. Wilkerson has COMPLETE visibility into ATMA. I’m talking daily updates on loan losses/forbearance. If ATMA was a guaranteed success Wilkerson could have convinced Helios to take it. But, he didn’t, which means ATMA is a big question mark. I guarantee there are tons of bad debts piling up. And, the prognosis goes something like this... if energy demand, travel, and life in general return to normal in the next 6 to 12 months then ATMA will probably work out ok, but if it doesn’t then we’re probably impairing this sucker big time.

Remember, ATMA was already a red flag when it asked to defer interest payments back in December - even before Covid emerged as a threat.

No doubt FAH’s Wilkerson has plenty of IQ. A Harvard MBA and a masters from Yale is ample evidence. I have a hunch his experience with CIG and ATMA will propel him to world-class turnaround expert status. And, I’m sure he is experiencing a lifetime’s worth of stress these days.

But, concentrating $500+ million into a falling knife bank holding company, a horrendously mismanaged infrastructure company, a startup education company, and a couple AGH spin offs was a terrible rookie mistake - fueled by impatience, lack of discipline, and unawareness of one’s circle of competence. (The blame can be shared by Wilkerson, FFH’s investment team, and FAH’s board.) The whole fiasco was a hope strategy that didn’t work out.

From what I’ve gathered in a few hours of digging, Helios is much more in line with the type of investment manager you would expect of a partnership with a reputable billionaire like Prem. Being the largest, fastest growing, savviest Private Equity group in Africa comes with plenty of competitive advantages. (I’m intrigued by the little I’ve learned so far about their growth, telecom business, and dollar denominated credit operation.)

My gut says Helios got wind that Prem was looking for a new investment manager for FAH. I suspect Helios has plenty of investment opportunities that could thrive with more access to dollar bills. I suspect Helios was aware of FAH’s large cash position, and skillfully and compellingly made Prem aware of what Helios could do with a couple hundred million of extra US dollars (remember, Africa does not have access to the Federal Reserve’s dollar swap lines. There has been a run on dollars, and African business is a fish out of water without dollars.)

I suspect Helios said to Prem something along the lines of “if you not only give us control of FAH’s $140 million of cash & equivs, but also kick in an extra $40 mil while taking ATMA’s risk off the table, we already have the breadth of opportunities and knowledge (aka more ideas than capital) to immediately deploy US dollars so incredibly profitably that investing in Africa during its 40% off sale will feel even easier than investing in US equities in the 1970’s.”

Prem says “where do I sign the check?”

I do not know if you were on the call for AGM 2020 and heard Prem and Michael's comments when they were asked point blank if there is any stress in any of the businesses including ATMA or CIG...their response was basically that their internal tests indicated that businesses will be able to manage on their own apart from the 40mil to ATMA . Prem called the share price at 3$ an absolute joke .

They basically cannot sell at ATMA for 40 mil to a related party without marketing the business independently to the market. UBN stake alone could have easily fetched 80-100mil .

I hear what you're saying on ATMA. I think if the ATMA transaction was done in isolation (not as part of a broader deal with Helios), without additional explanation, it would raise red flags - and maybe even spark some legal activity.

But, it's clearly a deal concession. Fairfax and Helios both well know the importance of speed when it comes to doing deals.

I suspect that during the diligence process Helios couldn't pinpoint the value of ATMA (especially with recent devaluations, and with so much of the equity stakes collateralizing debt). Helios probably considered selling it post-transaction, and realized it could be a nightmare, especially since the recent deal had collapsed. I have a hunch Helios had conversations with the parties involved in the prior deal that fell through (I feel like Fairfax would allow those types of discussions), and probably with other potential buyers, none of which alleviated concerns related to ATMA.

My guess is Helios raised ATMA as a deal breaker. Fairfax wanted to salvage the deal, had to think quickly, probably considered multiple solutions, and proposed taking most of the ATMA risk off the balance sheet by buying it at ATMA's public market value. There were alternative solutions;

- Fairfax could have offered to infuse more cash by buying more shares of FAH at around $3.00 per share
- they could have offered to loan FAH money
- they could have offered Helios more equity in the deal, etc.

I think Fairfax recognized the value of a partnership with Helios, knew they needed a quick solution specific to ATMA, and probably did the right thing to salvage the deal.

I think this deal de-risks FAH big time. I think it's win win for Fairfax and Helios.

I think Helios will leverage this relationship to launch a few $3 to $5 billion funds over the next decade, which will gush cash into the new FAH (Helios Fairfax Partners - HFP). I think HFP will provide a lot of visibility into how Helios performs, which will be reviewed by potential investors in their PE deals, so Helios will have plenty of incentive to assure HFP performs very well.

Assuming Helios can continue drumming up value in Africa for years to come this deal should create a virtuous cycle for HFP owners and for Helios's partners.

If it turns out Helios is more skilled at raising funds than investing profitably, then at some point HFP will languish. If that happens Fairfax still has control.

So, at the current price, over the next decade, I see this as landing somewhere between an investment that languishes (but, doesn't go to zero unless we see crazy leverage introduced), and maaaaybe a 10 bagger if Helios rides a wave of strong African economic growth, strong investment performance, and strong fund raising.
I agree with you broadly and things could have very well gone down that way. But the least FAH mgmt could have done is explain why they couldn't liquidate their stake in a public company(UBN) worth 180 million dollars for even 100mil. Were there no takers at a 50% discount to the current share price? and top of that no color on the financials of helios makes it very hard to give them the benefit of doubt.

Michael Wilkerson is incharge both at ATMA and FAH and gives a sweetheart deal( based on the info they shared) to the people who hired him without any explanation does not the pass the smell test at all.
« Last Edit: July 13, 2020, 03:20:55 PM by hobbit »

Xerxes

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Re: Fairfax Africa
« Reply #73 on: July 14, 2020, 12:19:10 PM »
They owe it to their minority investors to have a separate conference call walking through the merits of this transaction with Q&A session. That would be a right thing to do.
The related Q&A cannot be 5 min of the Q2 main FFH conference call that is couple of weeks or so.

SharperDingaan

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Re: Fairfax Africa
« Reply #74 on: July 14, 2020, 01:38:34 PM »
Treat it as a learning experience in investment strategy.
Master it, if you intend to invest in the 2nd/3rd world. 

Three main takeaways.

1. A minority shareholder has no place investing in a FAH. He/she has to trust the majority shareholder, believe in their 'vision', and accept that the entire information structure of the new arrangement - puts them at a severe disadvantage. Lot more 'real' to just write a cheque to Oxfam, or invest in an african gold/platinum miner.

2. FFH sucks at this.  Sure, they should do better under the new management going forward - but they are still neophytes. Given how hard it is to outrun devaluation/corruption, and how easy it is to screw up; most would expect more fails than successes. Implies that FAH is worth more as a short, and that there is a bias towards taking the minority out altogether - at a discount.

3. If you want to invest in Africa, use an index fund - & bet against the MCSI Index. Diversifies the risk, buy at a deep liquidity discount when there is a rush for the exits (today), sell at inflated prices when there is a rush back in .... Helios reporting outsized profits, triggering a gold rush  ;)

We live in interesting times.

SD


« Last Edit: July 14, 2020, 01:41:39 PM by SharperDingaan »

Xerxes

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Re: Fairfax Africa
« Reply #75 on: July 14, 2020, 01:51:26 PM »
Agreed
Though I should clarify that I never had a position on FAH.
Only FFH and FIH. But the lessons applies to FIH as well.
I am just more comfortable with India and wrapping my head around the narrative. The governance concern is common though.

Xerxes

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Re: Fairfax Africa
« Reply #76 on: August 07, 2020, 12:27:40 PM »
Folks

Fairfax Africa is down 7% while Jumia is up 7% based on today.

It is time to temporarily don a Robinhood hat and go triple-leverage long on Jumia, and be back before dinner to FAH.

Thrifty3000

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wondering

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Re: Fairfax Africa
« Reply #78 on: September 18, 2020, 02:12:12 PM »
Sorry, I missed this, and if I am not mistaken there is no playback,

Did anyone listen to this?

petec

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Re: Fairfax Africa
« Reply #79 on: September 21, 2020, 02:59:02 AM »
Notes from the call.

My summary:
- Helios are impressive.
- HFP will be a very different animal to FAH, with fee streams, more/better deals, and a dividend.
- Those wanting real details will be disappointed and need to wait for the circular.

Call notes:
   - Deal creates Helios Fairfax Partners, which aims to be the pre-eminent investment vehicle for Africa, combining private equity capital and permanent capital.
   - Founders met Prem c. 1 year ago and deal developed over 6-9 months. Helios had been looking for permanent capital for years to seed new funds and support strategic/control acquisitions. Met Fairfax and immediately saw cultural similarity - shared vision and common investment principles.
   - In effect FAH is buying Helios for 45.9% of the combined company. Fairfax gives up its fee. HFP pays a fee to Helios, but then Helios pays 100% of investment fees net of expenses to HFP, plus 25% of carry on Helios' 3 old funds, which have a lot of room to appreciate, plus 50% of carry on Helios IV and any new funds. More details to come in circular late sept/early Oct. Deal closes end Oct.
   - OMERS accepted ongoing trading restrictions in order to do independent due diligence and approved the deal.
   - Opportunity in Africa is "very significant indeed". "The word excitement doesn't capture how we feel about this" deal. Public listing increases visibility and ability to hire and comp the best people.
   - Helios team will manage legacy PE funds and will co-manage the FAH balance sheet assets with Mike and his team.
   - Helios
      ○ Have a 15 year track record having raised 3 PE funds and with a small private credit business (think this is advisory) which they want to grow. They are now the largest Africa-focussed private investment firm with $3.5bn in AUM from sovereign wealth funds, pension funds, family offices etc.
      ○ The two founders of Helios, Tope Lawani and Babatunde Soyoye, are Nigerians (unique for an African PE fund to have African founders, amazingly) with outstanding academic track records and met at TPG Capital. This is their life's work.
      ○ Investment partners have average 20y private experience. Team predominantly African - big advantage.
      ○ B-Corp with active CSR programme.
      ○ Buy or build market leaders in key economic sectors. Active.
      ○ Have invested in 30 companies since inception across startup, growth, carve-out etc. 24 investments today.
      ○ Generalists with particular expertise in financial services/technology (own several payments platforms), telecom and telecom infrastructure ("literally founded" the first telecom towers business in Africa, which they sold, and their second one, Helios Towers, is listed in London), consumer non-discretionary (food & beverage), energy (power, particularly distributed solar, and midstream gas/LNG regas because they are big believers in gas as a transitional fuel), and real estate (focussed on rental accommodation for student and recent graduate housing where the other options are expensive and deplorable, and logistics).
      ○ Several examples of companies created from scratch or via mergers.
      ○ Broad range of exits covering sales, listings, and other methods.
      ○ Unique edge is knowledge of and commitment to Africa, and a proven capability to manage complexity. Partner of choice in Africa - institutional but also entrepreneurial and pioneering.
   - Q&A
      ○ Is there an information asymmetry between Helios LP investors and FAH minorities? No - the latter don't have a view of Helios economics. Circular will give a comprehensive view and there will be ample time between the circular being published and the shareholder vote.
      ○ Fees and dividends? HFP will have a stream of income which will be "very significant" over time. "We will certainly be looking at a dividend policy" which will be explained in the circular.
      ○ Helios invests in Francophone Africa. Yes. Team is bilingual in the English/French sense so able to execute in Francophone Africa. One advantage of this is that the CFA currency is pegged to the Euro in a sustainable way, so they have to worry about fx less - elsewhere they spend a "huge" amount of time on fx risk, and try to find companies with natural hedges because they sell in hard currency or have pricing power).
      ○ ATMA - presumably FFH thinks it is undervalued, as FAH has always maintained. How is that fair? Prem and Mike answered this, not Helios. FFH did not want to do this - Helios felt the exposure was too high and required it as part of the deal. Also, the transfer price is at a significant premium to market value and you have to accept there will be challenges as a result of the ongoing economic impact of Covid, particularly on financial institutions.
      ○ African GDP? Over 15 years you see patterns. One is that economic cycles are short and shallow. That makes investing in cyclicals that require the economy to be buoyant is challenging. Prefer to focus on long term, non-cyclical, secular opportunities driven by things like demographics, urbanisation, technology, innovation. Another is that some countries have reformed - Cote D'Ivoire, Morocco, Egypt, increasingly Ethiopia; while others - Angola, Nigeria, South Africa - have not. Focus on picking spots with both good macro and good exit environments.
FFH MSFT BRK BAM ATCO LNG IHG TFG CGT DC/A