Where you raise capital makes a difference

inflation valuation tool

Humans aren’t simple creatures. Markets are the result of lots of humans (and a few algorithms) coming together to trade stocks. As a result, markets aren’t simple creatures either.

This is why it makes a difference where you raise capital, even if the eventual deployment of that capital is to the same place. A perfect example is Renergen, the JSE-listed group that has its eye on the Nasdaq.

Why? Because Renergen is essentially a startup, despite the extent of development that has already taken place at the helium project in South Africa.

South African institutional investors aren’t forgiving of companies that “build in public” – raising and spending money like wildfire in the pursuit of an audacious dream. The Americans understand this approach a lot better, which is why Renergen has looked to the US market as a source of both debt and equity capital.

The debt capital is in the bag, provided the equity capital can be raised. Aside from the immediate lesson here about finding the right place to raise capital, the other lesson is that companies find it very difficult to raise debt unless there is sufficient equity in place as well.

This brings us neatly to recent banking updates in South Africa.

Drown in debt

Smaller balance sheets are starting to drown

Although South Africa’s infrastructure challenges are somewhat unique at the moment, the reality is that a high-inflation, low-growth environment (commonly called “stagflation”) is a very tough place to play. This is where balance sheet strength really makes a difference, a phenomenon that is clearly visible in recent banking updates.

Across the South African banks, it looks like credit loss ratios are blowing out in retail and business banking, with corporate and investment banking dragging them back into line on an overall basis.

The lesson from this? Banks are tightening lending criteria in difficult times, particularly to smaller borrowers. The availability of debt is decreasing and the cost is going up, which can have a negative impact on the likelihood of successfully buying and selling businesses.

Of course, for those with “dry powder” as bankers like to call it (money already in the bank for deals), this can be the catalyst for doing truly great deals. A valuation on paper is one thing, but a signed transaction and money in the bank is quite another.

Capital allocation is key

Looking at the US and specifically the golf sector, we can conclude that golf is difficult. If you’ve ever set foot on a golf course, you would know that already.

Jokes aside, Topgolf Callaway is a lesson in capital allocation, particularly vs. its pure-play competitor Acushnet. The latter group makes up for its unrecognisable name by having one of the best stock market tickers around: $GOLF. Ferrari deserves a special mention here for $RACE.

Returns count more than tickers. Luckily, Acushnet is doing better on that front as well. Considering these companies operate in the same industry, the performance differential over five years is like watching the local 18-handicap walk onto the course against a PGA (or LIV) professional:

Capital allocation is key

The reason? Capital allocation. Acushnet has stuck to its knitting and focused on doing what it does best: golf equipment and apparel. Topgolf Callaway has focused too much on the first part of its name, rolling out a chain of golf entertainment venues in North America that have dicey economics.

Not only is that a questionable use of shareholder capital (with resultant pain in the share price), but it calls into question whether the company is paying enough attention to the core business.

This brings us to our final hole for this round.

You can have too much of a good thing

If there’s one thing we’ve learnt from the recent performance at Mr Price, it’s that a group can truly lose focus on its core business while chasing exciting deals. The South African retailer is struggling in its value clothing business, although the blame is being put on everything but the potential distraction from a recent flurry of dealmaking.

Experienced hands know that every deal in a corporate is a source of significant distraction. When business is tough in the core operations, this can quickly spiral into an unfortunate outcome for investors.

The lesson? If you are looking for a bolt-on acquisition, be incredibly careful of forgetting to water your existing garden while planting somewhere else. Before you know it, those flowers that survived several winters can disappear without a trace.