This story was featured in Ventures Africa magazine’s October/November issue….
VENTURES AFRICA – According to oral tradition, when the Bafokeng or “people of the dew” first settled in 1450, the valley in which they did so experienced heavy overnight dew, holding the promise that the land would be fertile and that, in turn, the community would prosper. Some 160,000 people currently prosper in the Rustenburg valley, which contains one of the largest deposits of platinum group metals in the world. Owing to a novel approach to development, the revenue generated from this scarce mineral resource has been widely and wisely invested, for the benefit of the entire community.
For many years the Bafokeng people have been heavily dependent on these natural assets mined from the land. But at the current rate of extraction, the mineral reserves will run out within the next three to four decades. The Royal Bafokeng Nation (RBN) has realised this and know that they need to reduce their reliance on natural resources and instead develop other avenues of wealth generation.
The Plan to Turn Things Around
In the mid-1990s, Kgosi (King) Lebone II (the current King’s brother and predecessor), announced Vision 2020 – a progressive, ambitious, development plan that would address this new challenge. The current King, Kgosi Leruo Molotlegi, who took the throne in 2000, has taken this further still, in the form of Vision 2035, laying down grand plans for the growth and sustainability of the community and its economy.
But all of this determined development would not be possible without capital, and it is here that the RBN and its principal investment arm, Royal Bafokeng Holdings (RBH), sets itself apart. RBH was established in 2006 to manage and grow the commercial assets of the RBN. It was created through a merger of Royal Bafokeng Resources (established in 2002) and Royal Bafokeng Finance (established in 2004). The RBN, through the Royal Bafokeng Nation Development Trust (RBNDT), is RBH’s sole shareholder.
RBH functions as a communitybased investment company whose primary investment aim is to generate the income required for the funding of sustainable projects. Income generated from RBH’s commercial interests is invested in infrastructural development, as well as in the members of the Nation itself. Over the past decade, more than R4 billion ($475 million) has been spent on roads, utilities, schools, clinics and other public amenities. This has benefited not only the Bafokeng, but other people living in the North West Province of South Africa, the area which the RBN calls home.
When asked about RBH’s success, Lucas Ndala, Acting CEO of RBH, says, “One of the key things has been leadership; strong leadership and strong governance. The model has always been to build the community into one of excellence, and to build for the future. It is intergenerational – what we do today should also benefit future generations. Everything that has come into place has made sure that the model is sustainable and continues to grow.”
A Different Investment Philosophy
In accordance with the goal of creating a self-sustaining community, RBH holds a holistic and long-term view when it comes to investments, portfolio management and resource allocation. Because RBH exists solely for the benefit of the Nation, the commercial and social investment mandates and strategies are very important, and the views and opinions of the people are key in determining the manner in which the portfolio is managed. Significant holdings in the mining industry aside, RBH’s investment portfolio currently includes assets in the telecommunications, financial, manufacturing, services and infrastructure sectors. All the shares are held by the RBNDT, which also has social delivery entities: the Royal Bafokeng Administration, which serves as a municipality, providing utility and social services to the community; Royal Bafokeng Enterprise Development (RBED), which promotes local economic development; and the Royal Bafokeng Institute, which concentrates on education.
When asked about the current market value of assets, Ndala considers before answering that as of end June, it was R34 billion – R24 billion after debt. He seems satisfied with these figures, though he does say that their goal in the next five to 10 years is to have a portfolio in excess of R100 billion. And profit after tax? “If you consolidate everything, the current year generated a revenue of about R10 billion, with an operating profit of just over R4 billion. Profit last year was about R 3.1 billion,” he says.
When it comes to investment planning, the RBH executive team is fastidious, following a strategy designed to make capital returns, diversify the portfolio and maximise dividend flow to the RBN. Also crucial is the stated goal of decreasing dependence on platinum group metals as a primary source of wealth. Affirms Ndala, “The strategy of late has been more to diversify the portfolio, such as the acquisition of RMBH and RMIH.
Our strategy also includes growth for the future, and we’re focussed strongly on infrastructure and telecoms, as well as services/industrial, and bulk share investments. We’re also focussing on financial services, which straddle all of these areas because they allow for the funding of resources.”
As the intention is to build a portfolio that will consistently give the shareholders a steady return, Ndala says that the existing portfolio is currently under review. “Now that we have reached a certain size, some of the initial investments are now so small that the time and energy they take up doesn’t warrant keeping them. So we will release some of that capital and reinvest it elsewhere,” he says. “RBH is the revenue generator for the shareholder [RBN], so a more balanced portfolio gives a more consistent return. If one sector is down, the other balances it out. We saw this recently with RMBH, where platinum went down and financial services went up.”
The team dedicates a considerable amount of time, effort and research to analysis, scrutinising the reasonable value of potential targets, and the long-term growth opportunities they hold. The philosophy is that it is preferable to pay a fair price for a wonderful business than a wonderful price for a fair business. They believe the higher compound return generated by the wonderful business will more than compensate for the initial discount on buying into a business that has an average growth rate.
At all times the company tries to position itself so to maximise access to relevant deal flow.
This affords them the greatest possible choice. Ultimately, RBH’s investment activities are opportunistic – they seek out undervalued asset classes, industries and companies, identifying areas of strategic importance, but being careful not to overpay on specific investments. The Nation’s investors take refuge in value, buying into businesses at prices that do not factor in high future earnings growth rates. As a general rule of thumb, they avoid buying assets that are trading on high P/E ratios. According to the executive team, “We try to invest in a contrarian manner – buying out-of-favour assets which are at the bottom of their profit cycles and are therefore most undervalued. Similarly, should we seek to sell non-core assets we would aim to do so when they are ‘hot’, near the top of their profit cycle and relatively overvalued.” What they don’t avoid is a belief in trends and cycles, as they have recognised the importance of cycles in economic growth, commodities, interest rates and other macro drivers on company profiles and share prices. “Timing cycles, however, is tricky. We would rather buy into businesses that we can hold through cycles. The terms of purchase can be further enhanced through securing BEE discounts, mispriced options on follow-on purchases and the judicious use of debt funding,” the executive team said.
The Importance of Partnerships
Critical to RBH’s many successes is their approach to partnership, and all stakeholders have a role to play in RBH’s drive to create value. Ndala says that while RBH is looking for its next investment opportunity, one has yet to be found. “Remember it must be in line with our strategy,” he explains. Currently, the group is trying to better understand African countries, and looking for partners on the continent. “We see ourselves as a Pan-African player,” he says, “and we want to invest more in the African continent. For us that would be a great achievement. Africa offers better returns than many opportunities off the continent.” When asked what challenges they’ve faced, Ndala says “access to good investments”. He also says there is a common misconception that RBH has “deep pockets”. Instead, he elaborates, the group is more conservative in its offers.
For the Good of the Community
The full implications of RBH’s vision has, at the very centre, an understanding that the well-being of the Nation is inextricably linked to environmental, social and economic integrity, as well as political steadiness. Thus, when making an investment decision, RBH considers first and foremost the implications from a commercial perspective, but second to this, the broader impact that it will have. Said Kgosi Leruo Molotlegi, “Our vision of becoming the world’s leading community-based investment company means looking beyond the balance sheet to ensure that RBH and its investee companies pursue the most progressive policies in terms of environmental management, social return and good governance.
A strong and holistic view of sustainable business is at the very core of RBH’s mission.”
The dividends from RBH, as well as interest income generated by RBN cash holdings, almost entirely finance the Nation’s development aims and activities. The development agenda, PLAN35, and its Masterplan aim to ensure the creation of a competitive, thriving and self-sufficient community that contributes to, and participates in, the national and regional economies of South Africa.
Says Ndala, “The leaders of the Bafokeng have always been visionaries and the thinking has always been around the future.
When Vision 2020 [the precursor to PLAN35, and the idea onto which Vision 2035 was added] was announced, they looked at the people and asked, ‘What do we want our people to be like?’”
Vision 2020 was designed around the development of people, and informed how the RBN should spend their money. PLAN 35 focuses on the development of the land – how to develop it so that it is sustainable over the long-term. “Because,” says Ndala, “once the mines are gone, then what? We need a sustainable economy.”
The Bafokeng community contributed to the drawing up and fleshing out of the plan, with internal consultations and assessments conducted among the people, asking what they wanted to see happen. “Historically the Bafokeng have always surrounded themselves with good advice,” says Ndala. “Over time they’ve continued to ensure they get the best advice. Going forward this is still so, and it will ensure that the vision is realised.”
Launched in August 2006, the Masterplan is the original vehicle for the materialisation of the RBN’s greater vision. Created to fit within the integrated development plan for the greater Rustenburg area, the Masterplan intends to provide key commercial, housing, healthcare, educational and recreational infrastructure. This vast endeavour will be executed in stages, taking some three decades to reach completion. I ask if everything is on track with the first and current stage of the plan? Ndala answers with an emphatic “yes”.
In short, the plan envisages that by 2035, the RBN will be in a position to offer a good standard of living to all of its citizens, provide superior education, job opportunities in a thriving local economy, and host sporting and cultural events of international standard. With economic development the centrepiece of the RBN’s Vision, sectors planned for expansion include tourism and hospitality, agriculture and mining, sports oriented businesses, education, and health-related industries.
Although the master plan is focused solely on the RBN for now, it is hoped that its eventual success will demonstrate a socio-economic model that can be replicated in other parts of Southern Africa – and perhaps even globally. Says Ndala, “Every community has to look at its own unique circumstances. One key thing that they can take from us is the importance of good leadership. We’ve always had good leaders who work for the interests of the people. For other African communities to be like us, their leadership must be good.”
When asked how he, personally, feels about the Masterplan, Ndala replies, “For me it’s one of the visionary plans, as always. And as somebody once said, everything starts with a dream. Back when King Mokgatle first bought the land, some people thought ‘what is this man doing?’, but I think it showed vision. I think, if you have a vision, nothing can stop you from achieving it. This is achievable, as long as we all work together to get there.”