RMB’s Mike Pfaff goes small, CAVI

Michael Pfaff, outgoing CEO of RMB, is to join a close friend to offer long term private-equity-type services when he leaves the bank at the end of the year.Pfaff believes hundreds of entrepreneurs with medium-sized businesses need the access to capital, the dealmaking skills, the network, the leadership and operational skills that he and partner, Michael ten Hope will be able to offer through their company, CAVI.

Pfaff explains the business model: “Most private-equity deals are based on the buyer eventually selling. We want to buy to build. The idea is to partner with entrepreneurs, who want to realise the full potential of their businesses without the object of selling.”CAVI will take control or associate stakes only in businesses it understands. That excludes mining and high tech.

Pfaff says the new company will differ from other private-equity players in using its own money. It is not a fund manager. Owner-managers are its future. Pfaff sees CAVI’s business as complementary to that of RMB and expects to be a customer of RMB in the future, not a rival.

Pfaff anticipates the obvious question: “Why opt out as CEO of a company that made R5,2bn before tax to the obscurity of CAVI? Well, let me say first I am not your typical corporate person. I hate the limelight and accepted the position of CEO with some reluctance.”Pfaff doesn’t say it but Sizwe Nxasana is most likely to be FirstRand’s (JSE:FSR) next CEO. You could speculate that he had gone as far as he could in that hierarchy.

After eight years at the top of RMB, he needed a new challenge.”I was considering stepping down more than a year ago but then we hit our problems in equity trading. I felt I had to see that through before stepping down.”While I am not a corporate person, I really love private equity and dealmaking. Mike ten Hope has been a client and a close personal friend for ten years.”RMB’s private-equity portfolio comprised some 80 clients and was worth R4,5bn, compared to cost of some R2bn. There are one or two bigger players but RMB’s is all on its own balance sheet.

Pfaff’s unexpected resignation prompted some to wonder whether he had been offered the top position at another of the big-four banks. Pfaff denies it.”It’s hard to believe there’s a nicer corporate job anywhere than the one I am leaving. I feel huge loyalty to GT, Laurie and Paul and can’t see myself opposing them.

“Others wondered whether the $200m loss in the equity trading division revealed in FirstRand’s last interim prompted the move.But when FirstRand announced this week that Alan Pullinger will take over, FirstRand was fulsome in its praise of Pfaff, who, it said, took profits from R700m to R5,2bn in eight years.I asked FirstRand CEO Paul Harris if the parting was amicable: “What a question! Michael took RMB to a totally new level. He opened new divisions and the profit record speaks for itself. We were very, very sorry to lose him. That said, Alan is a superb operator. I think we have managed the succession process well.”The equity trading catastrophe came about, says Pfaff, because RMB had a “long-short book”. It was long value equities and short the indices when the subprime disaster hit. In the flight to quality, value equities plunged, while index funds firmed.

Pfaff says RMB exited some of its value equities reluctantly but it had to be cautious when Bear Stern and Lehman were teetering.RMB’s profits last year came from four divisions: about 25% each from private equity, equity trading and investment banking, 12% from FICC (fixed income, currency and commodities) and 13% from other.

All divisions except equity trading are achieving record profits. As intimated at the interim, the loss in equity trading will dent performance this year but Pfaff believes past long-term growth is sustainable.He volunteers that much of the glory does not go to himself. He took over shortly after the merger with FNB. That gave RMB a bigger balance sheet and enabled a bigger annuity business and a bigger debt portfolio. Pfaff pushed equity.

The whole sector enjoyed great tail winds during his stint.”Another really big thing was that we were able to get our minds around the relationship side of investment banking. We had top product specialists and they were great at servicing clients, not only during deals but in between. They approached things from the point of view of what was good for the client. That brought clients back to us.”RMB topped a number of banking surveys and its name was on 50% of all BEE corporate actions in recent years.

Pfaff says Pullinger is a superb individual.He says: “Investment banking is a high-stress, high-energy business and burnout is common. You need a bit of churn. I am happy to leave a gap for others.”On its payroll RMB has former CEOs of listed companies, who take home a multiple of their former earnings.So what is CAVI? It recently became a significant shareholder of listed Beige Holdings (JSE:BEG).

CAVI also controls Dermalogica, an upper-market maker of skin creams, Incolab’s, which owns brands such as Lip Ice, Innoxa, Everysun and Gallia.Both the Michaels are CAs and MBAs. Both returned to SA from comfortable circumstances abroad. Pfaff came to RMB from a senior position at Bank of America.

He had emigrated shortly after Chris Hani was shot. While in the US, he picked up an MBA at Duke.Ten Hope chucked up everything in the UK – his businesses and a six-acre estate in Surrey – to return to SA. Both are dazzled by the opportunities for business in SA. They are of an age – Pfaff 46, Ten Hope 45.Pfaff believes the two complement each other. They are both experienced at dealmaking. Both are financially literate.

Pfaff, who built the staff of RMB from 300 to 1 300, including former CEOs of listed companies, can provide leadership and Ten Hope operational experience.Ten Hope comments: “In my early business career I really craved a roomful of experience, some grey hair and guidance. I could have avoided so many mistakes. We believe we have experience that will help.”Pfaff considers himself fortunate to have worked closely with the FirstRand triumvirate, GT Ferreira, Laurie Dippenaar and Paul Harris. The way they empower people and give talent its head is what most impresses him.

Doesn’t he have enough already not to get involved in a start-up? Is it the money he’s chasing?”If you have ambition, it won’t go away. I am an entrepreneur and excited to build something with Michael. I also wanted personal flexibility. You don’t run a large company. It runs you.”Pfaff enjoys a close family life with Tania, his wife for the past 16 years, and their three children. He admits that the pressure of work once took such a toll that he separated from Tania for six months.”It was the best thing that ever happened to us. It was a wake-up call for us both. Our marriage has been exceptional ever since.”

Moneyweb

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RMB’s Mike Pfaff goes small, CAVI

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