Sygnia, Wierzycka and several ‘small related party transactions’

Last week’s Sens announcement dealing with ‘small related party transactions’ involving Sygnia and associates of Magda Wierzycka, the company’s single largest shareholder and former CEO, is the latest remarkable development at this smallish but high-profile listed fund manager.

The small related party transactions involved the February 2020 renewal of property lease agreements between Sygnia subsidiary Sygnia Asset Management on the one side, and Beret Properties and Widok Properties on the other. The properties involved are The Foundry in Cape Town, Newport House in Cape Town and the Katherine and West building in Johannesburg.

Wierzycka is the executive chair of Sygnia, which she founded in 2006. In addition, she is a material shareholder in Sygnia through her associate The Zatoka Trust. Beret and Widok are both 100% owned by The Zatoka Trust.

Because of the relationship, Sygnia was required to provide the JSE with written confirmation from an independent expert stating that the terms and conditions of the agreements are fair to Sygnia shareholders.

Transaction deemed fair

The latest Sens announcement was confirmation that the transaction was deemed fair by independent expert BDO Financial Services. BDO’s analysis of market valuations and rentals concluded that the agreements were based on market-related terms and practice.

Although each of the three rental agreements was struck at 5% above going market rates, BDO said: “We are of the opinion that a variance of 5% in respect of a monthly rental value is within market-related ranges.”

However, Sygnia’s Sens statement provided no explanation for why the independent fairness opinion was released more than a year after the agreements had been renewed.

Delay attributed to the pandemic

Sygnia CEO David Hufton explained to Moneyweb that the delay was due to the Covid-19 pandemic.

“Those renewals were subject to an independent fairness opinion, which was not possible for a large part of last year due to the lockdown restrictions imposed on non-essential service providers. At the same time it suited our business to allow the agreements to tacitly renew monthly, as we continually assessed our need for office space while a large proportion of our staff worked remotely,” said Hufton.

Certainly the property agreements are not significant, but the delay in disclosure is.

And it does appear from BDO’s fairness report that much of the analysis was done on a desktop basis, which shouldn’t have been critically affected by the lockdown.

However, there’s no doubt that the period since Covid-19 began to wreak havoc across the globe has been a busy one for Sygnia.

Two busy years for Sygnia

A second related party transaction involving an investment in high-profile venture capital firm Oxford Sciences Innovation (OSI), major and unexpected changes in the leadership structure, the sudden resignation of a recently appointed director, and a fractious AGM from which journalists were banned, all helped to ensure that the Sygnia board was kept active during the past 24 months.

And then there’s the considerable inconvenience of having to bed-down its third external auditor in three years. After firing KPMG in July 2017 because of its involvement in state-capture, Sygnia appointed Deloitte.

Read: JSE to determine facts over Sygnia and Deloitte break up

In a Sens statement issued in June 2019 Sygnia said Deloitte had resigned with immediate effect after Sygnia communicated its intention to formally terminate Deloitte’s appointment. In July 2019 Sygnia appointed Mazars.

The Oxford Sciences Innovation deal

Perhaps the most significant development during the past 24 months has been Sygnia’s purchase of a 20% stake in OSI, making it the single largest shareholder in the entity, which owned rights to patents developed by Oxford University.

The investment, financed by funds from Sygnia Life and initially held by Sygnia UK, pre-dated the ‘formal outbreak’ of the Covid pandemic, and became an extremely attractive asset when OSI emerged as a major player in the development of the Astra-Zeneca vaccine.

The British-Swedish pharmaceutical company had developed the vaccine in co-ordination with Oxford University.

Listen to Ryk van Niekerk’s interview with then Sygnia CEO Magda Wierzycka about the company’s OSI Fund (or read the transcript here):

The first formal announcement of the relationship between Sygnia and OSI came in early March 2020 when Sygnia issued a Sens statement informing shareholders of two “small related party transactions”. The first transaction related to a service agreement between Sygnia Asset Management and a previously little-known entity called Braavos Investment Advisers.

Braavos is a limited partnership registered in England and Wales and its two 50% partners are Wierzycka and Andre Crawford-Brunt, who joined the Sygnia board as a non-executive director in October 2018.

The five-year service agreement involved Braavos using UK-based services and facilities owned by Sygnia Asset Management for a fixed annual fee of R13.9 million.

The second, much more significant transaction involved Sygnia Life committing to invest into various Braavos-related funds and to appointing Wierzycka, Crawford-Brunt and Braavos as the investment advisors.

The Sens statement provided no figure for the fees Wierzycka, Crawford-Brunt and Braavos would receive, merely stating the net effect of the two transactions is that a fee of approximately R11.1 million will accrue to Braavos each year.

Hefty investment advisory fees

This suggests Sygnia is paid Braavos investment advisory fees of a hefty R25 million in the first year of the contract, which is equivalent to around 1.9% on the R1.9 billion of assets Braavos manages for Sygnia and around 12.5% of Sygnia’s 2020 taxed profits.

What is remarkable about the announcement is the way in which Braavos was able to interject itself into the relationship between Sygnia Life and OSI and extract a hefty recurring fee.

Despite this, the March 2020 statement dealing with the two small related party transactions informed shareholders that BDO had provided an independent opinion “confirming that the terms of the Transactions are fair insofar as the shareholders are concerned”.

Weeks later, in early April 2020, Sygnia announced that deputy CEO David Hufton had been appointed joint CEO with immediate effect.

Things remained reasonably quiet during the next few months although there were ongoing rumours of shareholder unhappiness about the advisory fees being pocketed by Wierzycka and Crawford-Brunt.

This unhappiness appears to have boiled to the surface by the time of the Sygnia AGM in January 2021.

Journalists were banned from attending the meeting but parties in attendance reported that a key issue of contention was the related party transaction involving Sygnia OSI and Braavos. This appears to have been confirmed by the announcement, accompanying the results of the AGM voting, of Crawford-Brunt’s sudden retirement.

Hufton tells Moneyweb that all questions related to the Braavos related party transactions were answered at the AGM and during engagements in the following week. “There have been no further questions posed to us by shareholders on the matter,” he said.

The 2021 annual financial statements are likely to prompt a resumption of questions given that the funds invested in Braavos via Sygnia have been increased from R1.9 billion to R3.4 billion.

This means the fees payable for 2021 will be significantly higher.

Management changes

But getting back to the remarkable developments over the past 18 months: in late March Wierzycka announced that she would be stepping down as joint CEO, with effect from May 31.

Wierzycka, who remained a major shareholder, would become a non-executive director of Sygnia while Hufton became sole CEO.

“After successfully leading Sygnia since its inception in 2006, Ms Wierzycka will continue to play a key role in shaping the strategic direction of the company together with its executive team and its board of directors,” the company told surprised investors.

Investors were even more surprised when, on June 9, just over a week after giving up the CEO position, Wierzycka re-emerged as the executive chair with immediate effect.

“Ms Wierzycka will focus on helping the board to shape the company’s strategy, both domestically and internationally,” said a Sens statement at the time.

Wierzycka assured journalists that Hufton would have full control of the day-to-day operations as CEO but said she would be involved in strategy, including new projects. To this end she will be spending up to a year from September in the US examining investment opportunities.

Spate of departures

Meanwhile, earlier this week the company announced that Herschel Mayers, who joined the board on January 1 this year, has resigned with immediate effect.

Mayers’s departure is the latest in a spate of departures that leaves the board in the remarkable position of having only two directors who have served for more than five years – former non-executive chairman Haroon Bhorat and current executive chair Wierzycka.

In addition to Crawford-Brunt and Mayers who left this year, other recent departees are Shirley Zinn who resigned in December 2018, Kaizer Moyane in March 2020, and Ropfiwa Sithubi in December 2020.

Listen to Ryk van Niekerk’s interview with Magda Wierzycka (or read the transcript here):