Manager Research

Recently, Prescient Investment Management (Prescient) published a note to clients detailing its investment, through various of its funds, in Enable Capital Receivables Proprietary Limited (Enable Capital). Enable Capital has recently received media attention after the company entered into business rescue following the alleged misappropriation of invested capital.

How Did Prescient Invest in Enable Capital?

Prescient is an investor in Enable Capital through the Prescient Income Plus Fund and the Prescient Infrastructure Fund. We do not rate either of these funds but the Prescient Income Provider Fund, which we rate Tier 1 and invest in on behalf of clients, has small investments in both of these funds. The Income Provider Fund is a multi-asset income fund that can invest in a range of asset classes and its investment in the Income Plus and Infrastructure funds is not uncommon.

Ultimately, through its investment in those two funds, the Income Provider fund has a very small exposure to Enable Capital. The fact that the level of Enable Capital exposure in the Income Provider fund is small is important because if the Income Plus and Infrastructure Funds’ investments in the company were to be written down to zero this will result in only a 0.16% drawdown in the Income Provider fund.

Prescient’s risk management process and their approach to diversification in the Income Provider fund is reflected in the fund’s position size in Enable Capital.

The Prescient Income Provider Fund is managed with strict adherence to a risk management framework, with the daily risk budget being constantly monitored to ensure the fund does not have a drawdown over any rolling three months.

It is important to note that Prescient is not the only lender to Enable Capital and are therefore working alongside other creditors as well as the Business Rescue Practitioner to ensure the best outcome for investors is achieved.

Why is Credit an Effective Tool for Multi-Asset Income Funds?

Credit is a fixed income asset class. Investors who buy credit loan money to borrowers (typically corporates) in exchange for regular interest payments and the eventual repayment of that loan. Like other asset classes, the rate of return that credit investors realise on their investments must compensate them for the risk that they take on.

Credit is an asset class regularly used by multi-asset income fund managers to increase the returns that they generate for investors in a risk conscious manner. Indeed, all of the multi-asset income funds that we rate Tier 1 along with the Income Provider fund invest in various forms of credit.

Multi-asset income funds have very low levels of risk tolerance because they aim to provide investors with a stable source of income over relatively short periods of time while minimising the risk of capital loss.

For this reason, credit, along with other fixed income asset classes like bonds are better suited to multi-asset income funds than equity. In comparison to equity, credit investments are typically seen as less risky because (1) in the event of bankruptcy creditors get paid out before equity investors, (2) they offer investors fixed returns in the form of fixed interest payments where equities do not and (3) they are often backed by some form of collateral.

As a senior secured lender in Enable Capital, Prescient’s credit investment has the highest priority of getting repaid before other creditors and that investment is backed by collateral. In addition, Prescient believed that the rate of return being offered on this investment compensated them for the risk they were taking on.

The History of Prescient’s Investment in Enable Capital

Prescient originally invested in Enable Capital in 2021. The company was founded in 2018 to fund small, medium and micro enterprises, specifically involved in the deployment of local, regional and national fibre internet in South Africa.

South Africa’s fibre network has grown meaningfully over the past decade. However, subcontractors involved in the physical construction of fibre networks face challenges because equipment, building materials and fuel is expensive to purchase and hire. Enable Capital’s purpose was to help minimise these challenged by dealing with suppliers directly, helping to minimise costs for subcontractors.

During 2021, Prescient invested in senior notes issued by Enable Capital as we have described above. These notes were issued at an attractive yield and Prescient saw this as an appropriate investment in its Infrastructure and Income Plus funds.

Understanding What Has Happened Since Prescient Invested In Enable Capital

Since Prescient first invested in Enable Capital, they were paid regular interest on their investment. However, in November 2024, Enable Capital was placed in business rescue following the alleged misappropriation of funds. It is alleged that the company falsified the names of debtors and their signatures which subsequently led to the company overstating cash flows. These overstated cash flows were then used to finance other aspects of the business. Specifically, the cash was allegedly used to invest in other assets.

As a result of the overstatements, Enable started running into cash flow issues at the end of last year and were ultimately unable to pay interest to their creditors (of which Prescient was one), the company was subsequently placed in business rescue.

How is Prescient Managing the Situation?

When a borrower doesn’t honour their obligations to a creditor it is usually because they do not pay interest when it is due (or they don’t repay capital when it is due). This is technically known as a default. At that point, the creditor usually needs to make an assessment of how much of their capital they expect to recover.

There is usually uncertainty at this stage because determining what assets there are to repay creditors is an outcome of the business rescue process, which in this case is expected to conclude in March 2025. During this process, an independent audit firm will verify and assess the available assets. Prescient have confirmed they are actively involved in the proceedings and have been working closely with Enable Capital and the other lenders.

One option available to creditors like Prescient is to impair the value of the investment down to reflect what they think they will receive after the business rescue process concludes. To determine what that value should be a detailed assessment of the company’s financial situation is performed. At this stage, Prescient has chosen not to impair their investment in the company because they believe they will be able to recover most of their investment. In part, this is driven by the fact that they are senior secured lenders in Enable as we explained earlier and they currently believe there are assets in the business that they will receive as collateral through the business rescue process. With that being said, there is still a real risk that the assets will be impaired in some way.

Our View
We continue to rate the Prescient Income Provider fund positively. However, we do realise that what has ensued is not ideal for investors in the Income Provider fund. Ultimately, we rate Prescient’s risk management capability and a significant part of their investment edge has been the conservative nature with which they have managed the Income Provider Fund. In many ways, the outcome of that conservative approach to investment management, effective risk management and diversification has played out in this example.