Feeling a mix of excitement and caution about the Altvest IPO?
Like most investments, there are multiple sides to the story. Investment is a very personal process and each one of us must decide what is the right investment for us – based on our funds available, our time-horizon for investing, whether we need regular income and a number of other factors which have been discussed in various blogs and forums at EasyEquities.
Notes to Remember
As you evaluate opportunities like Altvest, prioritizing research is essential. Understanding the reasoning behind your investment choices is crucial.
Investments can be perceived differently depending on individual risk appetites — what seems promising to one person may appear risky to another. Engaging with various perspectives and insights from experts on our platform will help you make informed decisions that align with your values and educational goals.
Keep in mind that all investments carry their own risks and rewards. Take the time to educate yourself and make choices that are right for you.
An article by The Daily Investor covers both perspectives, provides views on the Altvest IPO.
Caution About New Company Listing on the JSE
Some people believe that investors should approach the looming Altvest Capital (AltVest) listing on the Johannesburg Stock Exchange (JSE) with caution. One such person is SaltLight Capital Management portfolio manager David Eborall, who has twenty years of experience in financial services in South Africa and the United Kingdom and whose funds can be accessed on EasyEquities.
In a comprehensive post on X, he said caution is warranted when investors look at Altvest Capital’s initial public offering on the JSE.
He said Altvest’s structures being listed create a sub-par outcome for investors. “The JSE should try to find a better and more equitable solution for retail investors,” he said.
He highlighted that investors should understand what they are buying and that preference shares do not have the same rights as ordinary shares.
“AltVest ordinary shares will be listed next month. In addition, it will issue a specific preference share for each SME,” he explained.
Eborall cautioned that preference shares present challenges, including voting rights, dilution, and residual value when winding up.
- You do not have any voting rights until preference rights are affected. In 99% of situations, the investor in the preference shares will have zero voting rights.
- AltVest can raise preference at will, so preference holders have no protection from dilution.
- Preference shares are subordinated to any debt that AltVest or its investee companies may incur.
“If Altvest is wound up, preference shareholders are only entitled to receive any accumulated dividends and a redemption price of 10 cents per share, regardless of the issue price on the JSE,” he said.
He added that there was a lack of financial disclosure on the underlying SMEs, leaving little chance to evaluate the intrinsic value of each business.
“AltVest is legally interposed between the investor and the SMB the whole time. The only connection is the right to receive dividends and liquidation rights,” he said.
“AltVest is the legal owner of the equity stakes, and the preference shares carry an economic interest in liquidation rights, liquidity events, and ordinary dividends declared by the SMEs, minus a bunch of fees and taxes.”
Another challenge is that the structure means that AltVest only has to offer JSE-level disclosure on its own business, not the SMEs.
Warren Wheatley responds
Altvest Capital CEO Warren Wheatley provided a comprehensive response to the warning from analysts. The full response is provided below.
"As an important point of clarity upfront, our investment instruments are considered Hybrid Financial Instruments and not Preference Shares as defined. This means that they demonstrate debt and equity characteristics and fit within a category of investment instruments that is both innovative by nature and well-established on the JSE.
Notwithstanding that, David is correct in his assessment that our “Preference shares” do not have the same rights as Ordinary Shares. This distinction is extremely important to both us and the JSE, and is a key theme of our Prospectus and supporting listing documents.
It is our core mission to democratise access to financial markets for both investors and small businesses. To do that, we serve as a highly regulated intermediary between these two parties, creating value for investors by allowing them to access opportunities that would otherwise be completely unattainable and creating value for small businesses by utilizing our structures to lessen the cost and regulatory burden of accessing listed markets to an affordable level.
It is natural that there are trade-offs in implementing and solution to problems as complex as this. If these small businesses could afford the financial and administrative consequences of being listed entities in their own regard, they would already be.
The important context that David’s comments does not, in our opinion, fully cover is that we voluntarily adopt additional protections to enhance investor rights beyond the minimum regulatory requirements. The responses that follow will highlight some of those additional protections.
Problem 1: Voting rights and appraisal rights
Whilst Altvest assumes direct Board representation on each of our investment entities to actively drive value creation and implement global best-practice corporate governance, all material shareholders of the Hybrid Financial Instruments are also invited to serve on the Board of Directors of each respective entity and enjoy direct access to the management of the SME.
This allows them a voice in management decision-making far exceeding the statutory voting rights ordinary shareholders generally receive, which is to opine on specific matters only, once a year at an AGM.
In addition to this, Altvest provides a community feedback mechanism that allows us to collate and share the wishes of all shareholders, with our role on the respective Boards positioned as a “proxy” representing those investors’ interests.
It is also worth noting that holders of “preference shares” generally do not acquire voting rights. This is a function of the type of instrument and what it aims to achieve. The folly in David’s analysis is that he potentially frames this issue in a manner that may be understood to mean this feature is unique to Altvest’s instruments. The reality is, however, that it is a feature of most preference shares, given their nature, as opposed to an Altvest invention.
David further oversimplifies the matter of appraisal rights. The appraisal right is not a general right but is triggered only in certain specified circumstances. It arises only in four circumstances, namely where a special resolution is proposed to
(i) dispose of all or the greater part of a company’s assets or undertaking
(ii) enter into an amalgamation or merger
(iii) implement a scheme of arrangement
(iv) amend the memorandum of incorporation by altering the preferences, rights, limitations or other terms of any class of shares in a manner materially adverse to the rights or interests of holders of that class of shares.
These triggers remain fully applicable with respect to all classes of Altvest shares, and therefore, David is simply incorrect in his characterisation of the application of appraisal rights.
Problem 2: No protection from dilution
For each Hybrid Financial Instrument, the number of shares per asset is predefined and capped, so dilution (for value) is not possible. In the event that we issue more hybrid financial instruments beyond that envisioned in the initial capital raise, we only do so to acquire more ordinary equity in the underlying investment entity.
As such, the percentage of the attributable value does adjust as a consequence of the sequence of share issuance, but that is compensated for by the fact that the Hybrid Financial Instrument holders are entitled to more equity value in the underlying investment entity.
Problem 3: No protection from debt or other superior equity on winding up
It is important to note that this is a largely theoretical discussion given that insolvency law is itself a highly technical discipline that could result in various potential outcomes, particularly for a business like Altvest that has complexity in its corporate structure.
The important point is that the ranking of claims in a liquidation is a function of the law as opposed to a unique feature of Altvest’s instruments. In terms of insolvency law, holders of preferred shares enjoy preference over the rights of ordinary shareholders. This principle is fully applicable to the preferred shares issued by Altvest. In David’s language, the preferred shares are in fact ‘superior equity’ in this context.
Notwithstanding that, there are a few important clarifications to note:
Altvest itself is a relatively debt-light investment entity. We classify our Hybrid Financial Instruments as debt instruments for accounting purposes and that may create the impressionof significant liabilities, but those are a class of equity in legal terms. As such, the likelihood of there being large creditors sitting in front of investors in the event of a liquidation is low.
Hybrid Financial Instruments are entitled to any proceeds from the sale of the ordinary shares linked to their investment as either a special dividend or a share redemption, as per the share terms. It appears that David has not considered the contractual rights shareholders are entitled to via the special dividend in making his comments.
In the event of a liquidation, it would be very difficult for anyone charged with governance of Altvest at that time to justify disposing of the investment stakes at a value significantly below fair value, as that would clearly represent value destruction for shareholders.
Altvest has, in its own rights, significant principal investment stakes in some of the investment entities (worth R80 mil + prior to the JSE listing). The proceeds from the disposal of these principal investment stakes would more than cover any conceivable debtors now or in the future, and so the value attributable to the Hybrid Financial instrument shareholders is unlikely to be a point of contention.
Problem 4: Financial information and disclosure
It is true that the application of the JSE-level disclosures primarily to Altvest Capital results in a significantly reduced administrative burden for the SMEs utilizing our investment platform, and that is a unique benefit we offer to these entrepreneurs.
Notwithstanding this, we voluntarily impose significant additional information and governance requirements on our investment entities, including but not limited to the following:
Preparing IFRS-compliant and independently-reviewed financial statements, a standard much higher than the legal bar for small businesses in South Africa.
Detailed information disclosures in the listing documentation for each class of Hybrid Financial Instruments. These documents are referenced in our Prospectus and are an important source of information on each respective entity.
A detailed governance and reporting enhancement workstream, which results in investment entities that utilize our platform becoming more professionalized with enhanced reporting over time. Bambanani, as an example, has undergone wholesale restructuring and the reporting and accounting therefore needed to be caught up.
A last, but important point of context is that the overwhelming majority of the shareholders in these entities are members of the community that purchase from/engage with these SMEs. They have been patrons of these businesses for years, and understand them intimately.
For ordinary South Africans who may be investing in these SMEs, this is the “smart money” they are investing alongside.
Regarding the analyst comment around the financial health of Altvest excl. ACOF
It is important to offer some context on our growth journey so far. Altvest Capital was incorporated in April 2021 and only listed in May 2022. We are thus less than three years old as far as our core operations are concerned. We are a start-up with an exciting, ambitious and noble mission in every sense of the definition. Our business model and concomitant revenue generation could only commence once listed.
Listing in itself required a substantial investment in establishment fees. The concept was highly disruptive and innovative, and required substantial marketing, legal and corporate advisory services. This cost overhang remains present in our financial statements but we are rapidly trading out of the deficit.
Establishment fees aside, we can confidently assert the following:
- Our expense run rate has been carefully managed and came in below the forecasts disclosed to the market in our pre-listing statement;
- Our assets were carefully and prudently selected and have all shown significant improvement in either value, capacity or impact;
- Our expenses, were all largely barter agreements, most of which for services rendered with no cash impact on the business. This includes our most recent outdoor marketing campaign;
- The establishment costs now being incurred has poised us to execute on our promised mandate with a lean execution team;
Regarding the analyst’s comment on the value of ACOF itself
The analyst’s assessment, while potentially based on some traditional metrics, overlooks the essence of what Altvest Capital has accomplished and the problem we aim to solve. We have created a unique structure that facilitates compromise between investors seeking opportunity and entrepreneurs in need of capital. This structure is essential in addressing two critical gaps:
Access to Opportunity for Investors
Traditional financial markets often limit access for ordinary investors, particularly in high-potential, high-growth sectors like SMEs and alternative assets. Our platform democratizes access by allowing investors, including everyday South Africans, to participate in opportunities that would otherwise be restricted to large institutions or accredited investors. This mission is fundamental to our offering— ensuring that ordinary people can partake in wealth creation, which has historically been beyond their reach.
Access to Capital for Entrepreneurs
On the other side, SMEs often face enormous barriers to accessing growth capital. Whether due to the high costs of compliance or the limited availability of non-traditional funding options, many high-potential SMEs are unable to scale effectively. Altvest’s structure and innovative approach lower these barriers significantly by offering alternative financing options, including through ACOF, which has already proven its value in the market.
The criticism that our credit fund idea is overvalued misses the point of the strategic importance of ACOF. This fund is not merely an idea but a fully operational business, having raised and deployed R200mil+ to small businesses in South Africa in just under a year, creating or preserving over 500 jobs in the process. It is much more than an idea, it is a real, sustainable and impacftul business solving an acute problem in South Africa. There are several examples of comparable SME lenders being purchased by established financial services players at significant valuations, and therefore, we consider it an established fact that ACOF and businesses like it have significant value.
To determine what that value is specifically, we adopt best-practice international financial reporting standards, and that means ensuring that the assets we own are measured at fair value. To that end, and given how material the value of ACOF is, its value has been independently determined by global and local investment firms on several distinct occasions, including as part of our audit and the preparation of our listing documents, respectively. Our view is that disregarding ACOF from the value of our business at this stage is lazy and does not fully consider our business or its intrinsic value.
General Comments
While the valuation of any early-stage business involves complexity, it is vital to view this through the lens of potential rather than short-term financial snapshots. Altvest is a relatively young company with significant setup costs associated with our innovative business model and regulatory compliance.
It is crucial to assess Altvest in light of our long-term vision. As a pioneer in democratizing investment and funding opportunities, our impact on both investors and SMEs will only grow over time. Early financial metrics do not capture the transformative potential of our platform or the unique value we bring to underserved markets.
In conclusion, while financial analysis remains important, it is essential to recognize the broader value Altvest Capital is creating. By solving real-world problems—access to capital for entrepreneurs and access to alternative investments for everyday South Africans—we are building a sustainable and impactful business, and our independently-audited and verified public disclosures suggest that we can achieve that mission while building a profitable business. We remain confident in our strategy and the value we are creating for all stakeholders.
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