PGC is such an obvious case of gross mismanagement and total abuse of power and the paralysis by the businessmen in this country perplexing. I absolutely agree with Chris Lee that George Kerr should not be allowed to run or be the director of a public company and neither should Bryan Mogridge. To allow him to be classified as an independent director is laughable (see this blog for details).
However, what is truly tragic is that this farce is allowed in the first place. Where are the real men in this country? The press is inadequate, KPMG was caught asleep at the wheel, the NZX nothing more than a rubber stamping organisation and the FMA and SFO are way behind the curve. The silence of Kerr and Mogridge's peers are deafening. So, where are the real men in this country?
Reese Hart stuck out his neck at the AGM and Chris Lee spoke up. That makes two. Please tell me there is more!
Cheerio,
jA
http://www.chrislee.co.nz/index.php?page=newsletter-display&list=2&month=February&year=2012
Taking Stock 23 February 2012
Participants in New Zealand’s capital markets know that it is a very small world here, where pretty near everyone knows a fair bit about everyone else.
Perhaps this inter-dependence on a small number of people is why 34 years ago my chief executive said to me that it was a brave and maybe foolish man who closed the doors to exclude any future relationship with any other market participant.
He offered this advice after I had told a rude lawyer to take his business elsewhere.
The concept of “never again” was brave and maybe foolish for one never knew who might end up in power, whether as a market regulator, a key employer, a source of income, a powerful politician, or a fellow director.
In a small country, the argument went, there just was not room for those who draw a line in the sand, and proclaim “never again”.
I have little doubt now that for ambitious young men, with an eye on a glittering career, the advice was, maybe is, pragmatic.
I am not a young man with an eye on a future career.
This may explain my view that it behoves the older market participants, with little ambition for fame or fortune, to take their sticks to the sand, and draw big deep lines --- and accept the costs, perhaps criticism, perhaps exclusion from lucrative deals, perhaps dealer room scorn.
Without some attempt to stop lousy practices, we end up like Wall Street, where greed overcomes decency, virtually every minute of the day. In my view this ultimately destroys society, let alone capitalism.
All of this is by way of explanation for my view that PGC’s shareholder/director George Kerr should not be managing money for retail investors. Wrong guy. Fullstop. Never again, with my help.
Kerr, often discussed on this website, should manage money only for those people who have the power and inclination to litigate every occasion when there is potential for a dispute. Compromise is not achieved by discussion or reason.
In my view Kerr should not be involved in a public company. He has none of the instincts or training that takes full account of the aspirations of retail investors. He lives in a world few of us would want to enter – a world where the only money that talks is “lots of money” and where those without “lots” are expected to be silent.
He does not wish to be bound to any stated, transparent strategy and wants to have the right to take any new direction he wishes, apparently unmoved by the effect change might have on those whose money he represents.
He believes that time will justify his decisions and seems confident that he can rely on the belief that future market and human behaviour is predictable, and that all of us will share his time frames.
He knows this now. It is why he is trying to privatise PGC, a process that a man better -suited for public company involvement would do at a fair price.
There is ample evidence on which to judge Kerr, especially in the convoluted manner in which PGC has evolved, and on the behaviour of those who manage the $100 million EPIC fund, one of his failed investment ideas.
Let me provide background.
PGC was the Christchurch-based company which put together Allied Finance with some other small players and rather cheekily renamed this group by pinching the old name of Marac. It also owned stock and station businesses, absorbing Reids and Wrightsons, and married these businesses, finance and rural services, with Perpetual Trust, sadly now seen as the country’s least admired trustee company, which is saying something, given the poor performance of all of the others.
The new “Marac” in the finance company bonanza years, grew too fast, under a chief executive and chairman who proved to be inadequate. It threatened to fail, dragging PGC with it.
Nor did the stock and station business do well, nor did its trustee company Perpetual prove to be well-managed. The world was changing too fast for PGC’s comfort.
PGC threatened to collapse.
Kerr, whose forebears were founders of the company, sought capital market help. Aided by some wealthy friends in Australia, PGC attracted more than $200 million of new capital, to restore Marac and underpin PGC.
Part of Kerr’s contributed money came by selling his fund management company EPIM to PGC for $18 million, a price that now seems absurdly bloated. EPIM managed EPIC, a fund Kerr had established to raise money to buy into Thames Water, and to seek other similar investments. EPIC has been an ignominious failure. EPIM, which manages EPIC, has dragged in fees, by the bucket-load, despite the failure.
Kerr’s timing with EPIC was awful. He bought at the height of the market. Investors have paid the cost. EPIM has mis-managed its foreign exchange exposure to sterling, effectively funding Thames Water with NZD to buy a UK pound asset for NZ investors. The UK currency has fallen making this strategy seem foolish.
But give Kerr his credit. His capital-raising restored Marac/PGC and now, cleverly merged with the Southern Cross and Canterbury building societies and renamed Heartland (HNZ), Marac seems likely to morph into a New Zealand-owned financial institution providing a useful, long-term role, aspiring to be a second-tier bank under a very good CEO. Thank heavens, it has been separated from Kerr’s empire.
Kerr was the energy for the PGC transaction, which I personally sub-underwrote, and supported as a shareholder. (I still own a holding in HNZ and PGC, happily in the case of HNZ, grumpily in the case of PGC).
The recapitalization of Marac was Kerr’s highpoint; possibly the only transaction he has facilitated that was easily comprehensible. He also can claim credit for finding a good CEO for HNZ.
Those investors who helped Kerr have so far lost about half their money, as PGC shares, added to Heartland shares, are worth barely a half of the price when the capital was raised.
Since the recapitalisation, it has all been downhill, for Kerr’s followers, in both PGC and EPIC.
Heartland has been separated from PGC, thank heavens, and PGC, as long ago predicted, wants to become George Kerr Incorporated, running Perpetual Trust Company (an ugly corporate trust company) and EPIM, which runs a distressed asset fund for a fee, without transparency, free to deal with related parties behind closed doors. PGC also owns a little of HNZ and PGGWrightsons.
The PGC shareholders, like it or lump it, now will adopt Kerr’s philosophies or will sell to Kerr, for a price that is nothing like the value of the company, according to an independent valuer, and just about every analyst in New Zealand.
I doubt Kerr will gain total control so PGC might remain a listed company with a majority owner who should not be a director or owner of a listed company.
I have little doubt that PGC will end up owning a good chunk of Jack’s Point, in Queenstown, an ambitious land development which by any assessment has been a failure, despite some most peculiar, sometimes involuntary and ill-advised support from the likes of Hanover’s investors, Babcock and Brown, South Canterbury Finance, and, mostly oddly of all, the Dunedin City Council, through its mismanaged Delta Corporation. (Why does Dunedin tolerate such poor decision-makers?)
Indeed the Jack’s Point saga, should it ever be honestly told in a book, might reveal much about an area of New Zealand business from which very few will emerge with much credit; deals within deals, risk transferred to others, dopey decision-making.
Meanwhile EPIC, Kerr’s fund that he designed to buy into Thames Water, promising to pay a 9% dividend for five years, and to be NZX-listed, now does not own any shares in Thames Water, pays no dividend at all and has not for more than a year, is not NZX-listed, but will still pay EPIM/PGC another $8 million, perhaps in celebration of its trifecta of failures.
EPIC explains the $8 million payment as being the price it had to pay for the change in ownership of EPIM (from old PGC to PGC now controlled by Kerr) and to settle the performance bonus due to EPIM (presumably for achieving its trifecta of failures). Performance bonuses to failing investments are an obscenity we can do without, I would have thought.
EPIC’s hapless, I would say gormless, Irish chairwoman, Margaret Devlin, has written to EPIC investors explaining that the 2007 prospectus foresaw possible contingencies and spelt out the formula for resolving these issues, should PGC/EPIM change hands. It has changed hands – from mostly George Kerr to all Kerr (for practical purposes). Given Kerr designed EPIC, ran EPIC, and still runs EPIC, there does seem to be semantics involved in the decision to claim a change in ownership.
The $8 million resolves the issues. Thank you very much.
The prospectus also spelt out how foreign exchange risk would be appropriately managed. It has not.
Quite why the prospectus foresaw these possible changes but did not foresee that the sterling might fall, that the banks might want to be repaid, that Kerr might take over PGC, that dividends to investors might not be paid, and that there might be no NZX-listing, is not quite so well explained, nor do investors get compensation for these awful failures. Thank you for nothing. No “performance bonus” for us, indeed quite the reverse.
All that investors now have is a barely discernible hope that EPIC’s remaining investment in Moto will recover value to restore EPIC to original value.
I guess if no dividends are paid, and if EPIM did not require more absurd bonuses for its management of EPIC, then one day EPIC would receive some, most, or perhaps all of their original money back.
If this happens in 20 years, EPIC will need to have grown at nearly 4% per annum in value, a possibility I would regard as realistic, but not certain.
In 20 years nearly all EPIC investors will either be dead, or have forgotten why they ever supported EPIC.
Perhaps it is my job to ensure they do not forget, even if it means closing a door on a fellow, George Kerr, who lives in the middle of the Macquarie world, and has enough spoils to be a constant presence in New Zealand’s financial markets.
Good luck to him. That world is not one I aspire to join.
My “never again” list now includes the names of George Kerr and EPIC chairwoman, Margaret Devlin.
Never means never.
Perhaps Kerr may contemplate whether it is he who has drawn the line in the sand, not me.
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