7 months ago
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After acquiring a 93.66 per cent stake in the Puerto Rican investment outfit Acrecent in February 2022, Sygnus Group set about streamlining the company and integrating its operations into that of the group.
Next came the question of how to make money from the acquisition. And Chief Investment Officer Jason Morris believes Sygnus has found a winning formula in a part of Acrecent’s business, that is, impact investing that reaps returns with attendant social and environmental benefits.
“In impact investing, what you’re doing with the capital is that you are trying to solve problems that are dealing with social issues. In this instance we are looking to deploy capital into industries or projects that will either mitigate the effects of climate change, foster adaptation or build resilience,” Morris said.
It aligns with the movement worldwide towards green financing to engender a more sustainable planet.
Through Sygnus Credit Investment Puerto Rico Fund, SCIPRF, the company is in discussion with Puerto Rican commercial banks to access what Morris said was their relatively low-cost funds.
The Puerto Rican operation is two decades old, and during that time it has set up at least four impact investment funds, Morris indicated.
“If we want our children and the grandchildren to have a decent world to live in, we have to start deploying capital to allow economies to adapt or to become more resilient to certain themes in terms of climate and the environment,” he said.
The fourth of the impact funds, valued at US$100 million, opened in June. Morris said it has the backing of the non-profit investment firm Calvert Impact.
“They are one of the pioneers in this arena. They are one of the largest impact investors in the world, and they have over US$5 billion mobilised for impact investing and they do this in about 125 countries across the world,” the Sygnus Group executive said.
With about US$46 million in assets under management, and another US$125 million to come, SCIPRF will have about US$171 million dedicated to impact investing, according to Morris.
Sygnus Credit Investments Limited, SCI, bought Acrecent through a special-purpose vehicle called Sygnus Credit Investment Puerto Rico Holdings, or SCIPR for short. It is designed to hold shares in the Puerto Rican entity. SCIPR is owned 100 per cent by Sygnus Credit Limited.
The group also includes Sygnus Credit Investments Puerto Rico Inc, SCIPRI, which owns 95.4 per cent of Sygnus Credit Investment Puerto Rico Fund, SCIPRF, which in turn owns Acrecent.
“When you look at SCI’s financial statement, this is the 95.4 per cent that is being represented,” Morris explained.
To separate the management of the Puerto Rican funds from the actual running of the entity, the company created Sygnus Group Puerto Rico Incorporated, which owns 100 per cent of a totally separate entity called Sygnus Capital PR LLC.
“Sygnus Capital PR LLC is actually the manager of the funds in Puerto Rico held in SCIPRF. This means that decisions around SCIPRF are different from those of who is managing SCI in Jamaica,” Morris said.
Given the structure and divisions, it means that the numbers emanating from the Puerto Rico operation cannot be consolidated all the way up to the SCI balance sheet, he said.
So Sygnus engaged consultants Ernst & Young, EY, to find a way for SCI’s 95.4 per cent ownership to be reflected, since it could not be consolidated.
EY settled on a customised valuation model which has to be used every quarter but refreshed every year to reflect changes in assumptions such as inflation, interest rates and other market conditions, Morris added.
“The way it works is that you take the balance sheet and income statement of SCIPRF and put that against other companies all over the world that are doing similar things; adjust the book value for a controlled premium; then apply a discount rate for marketability, and then apply a price-to-book value multiple,” Morris explained.
He added that given that price-to-book values fell during the COVID-19 pandemic and the valuation model is based on historic values, it would take time for the higher price-to-book levels to be reflected.
SCIPRF, he added, is profitable.
“The valuation model used to capture the results would not have reflected the record performance of SCIPRF simply because of what was happening to the market prices of the comparable companies which we were using,” Morris said, adding that at some point the values will be more reflective of the reality of the company’s performance.
SCIPRF has about 30 members of staff supporting that Puerto Rican operation. Its portfolio averages about US$80 million in alternative assets under management.
Morris says the company’s operational model differs slightly from that of SCI in that it has a programme of churning assets on its balance sheet by packaging and selling debt instruments for a fee. By doing so, Acrecent has managed to triple its earnings, while its assets under management have remained flat, he said.
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