Who does Sanlam’s R3.2bn ARCI bet really serve?

Patrice Motsepe and Sanlam go back to 2004, when Ubuntu-Botho Investments (UBI) was created as the insurer’s empowerment partner. More than 21 years later, Sanlam is writing a R3.2bn cheque into Motsepe’s unlisted investment vehicle – and, apparently, no-one wants to ask questions about it.

The amount is less than 1.7% of the financial services giant’s R189bn market cap so, yes, some would say it hardly warrants much discussion. Yet, despite a number of analysts privately expressing several concerns about Sanlam’s plans to pour the R3.2bn into African Rainbow Capital Investments (ARCI), none of these was raised during the Q&A section of last week’s results presentation.

There were many other, much bigger issues to discuss.

Which was a shame. It would have been useful to hear a rigorous discussion of the merits of Sanlam’s decision to pour R3.2bn into ARCI – and the potential conflicts of interest that come with it.

It’s not so much the size of the latest investment that justifies discussion, but the fact that the dominant shareholder in African Rainbow Capital (ARC) and ARCI is UBI.

UBI, created by Motsepe and Sanlam, is a broad-based, black-controlled investment entity. Most significantly, UBI is Sanlam’s empowerment partner: it owns 13% of Sanlam’s equity and has 18% of the voting authority. So, though the Public Investment Corporation is the single largest shareholder with 15%, UBI – essentially Motsepe – is the single most powerful voter.

For good reason, the empowerment tie-up between Sanlam and UBI is regarded as one of the most successful BEE deals in the country.

Not only was UBI able to pay for the shares with dividends received from Sanlam over the years, taking outright ownership in 2015, but under the impressive leadership of Johan van Zyl, the Sanlam share price appreciated significantly over the same period.

In 2015, UBI decided to set up its own investment company and, with the money generated from Sanlam, launched ARC. ARC, which remains wholly owned by UBI, is led by two co-CEOs: Van Zyl, who was CEO of Sanlam for 12 years, and Johan van der Merwe, who was CEO of Sanlam Investments for 13 years.

So, what’s the issue then?

Sanlam and UBI are very intertwined. This is problematic given that 87% of Sanlam’s shareholders are minority shareholders whose interests may not always coincide with those of UBI, which appears to be the dominant voice.

Sanlam might dispute any entity having a dominant voice, given that there are 11 independent non-executive directors on the board who, says Sanlam, “evaluate matters relating to independence and conflicts of interest in related-party transactions”.

In 2017, ARC listed ARCI on the JSE “to provide public investors with access to the ARC Fund’s diversified portfolio”. It turned out to be not much of a success. It wasn’t just that investment holding companies had fallen out of favour with investors years earlier – few could see the attraction of the motley collection of businesses ARCI had accumulated, as one fund manager told Currency.

Nothing Van Zyl or Van der Merwe said or did could persuade investors that the ARCI shares were worth anything close to net asset value (NAV).

Tensions between the market and ARCI became considerably worse when it emerged in 2020 that R205m of a R750m rights offer would be used to pay fund management fees to UBI. Under pressure, ARC subsequently U-turned and settled the fees from internal cash resources instead – but the damage was already done. Between 2018 and 2022, ARCI had paid at least R800m in fees to UBI.

In 2025, ARCI was taken off the JSE and shareholders were paid out at a 23% discount to NAV, which sounds miserable until you hear it was a 21% premium to the average price the shares had been trading at over the previous 30 days.

Strategic empowerment partner

And now, just under a year later, Sanlam Life is buying a 25% economic interest in parts of the ARC Fund – essentially the portion of ARCI that remained after the financial services assets were carved out.

Interesting details of the collection of assets in that portfolio are included in the “fairness” opinion provided by Deloitte. A 90.1% holding in phosphate miner Kropz Plc Group and a 21.8% stake in mobile communications group Rain together make up 63% of the portfolio’s value – just two of the 19 investments Sanlam Life is buying into.

The rationale for the investment is, according to Sanlam, that “UBI is Sanlam’s strategic empowerment partner and, in this context, the proposed transaction further deepens the strategic co-operation between Sanlam and ARC in private equity investments in South Africa and across the African continent”. So, essentially, they’re doing it because they’re mates who want to get closer.

Sanlam and UBI also believe alternative investments represent “a compelling commercial opportunity across Africa and play an important role in contributing to the broader development of the markets and communities in which Sanlam operates”.

It is a portfolio trade, Sanlam tells Currency. “We are simply swapping listed assets for unlisted assets by exiting investment in the Sanlam Life shareholder portfolios and replacing these with the investment in the diversified investments portfolio.”

So, Sanlam has no shortage of reasons to buy into this alternative investment. It’s just that none of them is particularly compelling. As one concerned analyst tells Currency, these are pretty much the same assets the market found unattractive a short while ago – so why are Sanlam shareholders being forced to pick them up now?

It’s not the first time Sanlam has invested in ARC, but the previous investment – a R2.4bn investment about two years ago – was in ARC’s financial services businesses, which, the analyst says, was easier to justify.

Is this part of something bigger?

Protea Capital Management CEO Jean Pierre Verster sees the rationale from ARC’s perspective: the deal, which involves the issuance of new shares, brings in a large chunk of money. But he struggles to see why Sanlam would want to own 25% of another portfolio managed by another team.

“Unless this is part of a larger deal,” says Verster, who picked up a rather oblique reference to “Sanlam Phase 1MD.docx” in the information considered by Deloitte for its fairness opinion.

If it’s hard to see the rationale from Sanlam’s perspective, could it be that the transaction is not good for its 87% minority shareholders?

Sanlam CEO Paul Hanratty has little doubt the transaction “appropriately balances strategic alignment with rigorous protection of Sanlam and its minority shareholders’ interests”.

Hanratty assures Currency that there are “robust and appropriate safeguards in place to protect Sanlam’s interests, including those of minority shareholders”.

The transaction was treated as a related-party transaction and subjected to enhanced governance beyond minimum regulatory requirements, says Hanratty. This involved a committee of independent directors evaluating it, and Deloitte providing a fairness opinion confirming the terms are fair to Sanlam shareholders and were conducted at arm’s length.

Which sounds quite reassuring, except fairness opinions have rather fallen into disrepute. Deloitte has processed considerable amounts of information in producing its opinion, but crucially, it relies on the parties for much of it. And, as in all such opinions, the discount rates and assumptions used are critical.

“There are some quite optimistic assumptions in the opinion,” Verster tells Currency, adding that much seems to ride on Kropz’s improvement.

Hanratty also says Sanlam has strong minority protections embedded in the ARCI memorandum of incorporation, including board representation, pre-emptive rights, veto rights over key reserved matters, restrictions on related-party transactions, and protections around new debt, asset sales and fee changes.

All of which sounds impressive – but doesn’t remove the suspicion that Sanlam is being used to fund the interests of a powerful group of its own shareholders.

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