risk finance for smes nazeem martin @ foromic (guadalajara, mexico) october 1, 2013
TRANSCRIPT
Risk Finance for SMEs
Nazeem Martin
@ Foromic (Guadalajara, Mexico)
October 1, 2013
The story
• Business Partners
– Background
– Track record as an SME risk financier
• Realities of SME risk finance
• Solving the SME risk finance conundrum
• Business Partners’ disbursements by instrument/product: Living with and developing an appetite for SME risk finance
A word of warning
• SME (risk) finance is not an exact science.
– There is a broad range of solutions designed to meet the risk finance needs of SMEs. Some have more desirable outcomes (and impacts) than others.
• Business Partners provides a very limited, simple, easy to understand and implement set of risk finance solutions for SMEs
– Business Partners’ solutions are not perfect. There is much room for improvement.
• This is Business Partners’ story (partially, at least)
– Of course it’s not the only story. There may be better, more powerful stories.
• Founded by Anton Rupert and his son, Johann Rupert, successful international entrepreneurs, industrialists & philanthropists.
• “Blue chip” shareholder profile
• Sustainable risk financier of SMEs in South Africa for > 32 years
• S. African & international office network – localized area offices
• Expansion into Africa: Country SME Funds in Madagascar, Kenya & Rwanda. Southern Africa Regional Fund (Malawi, Namibia & Zambia). Soon, an “Evergreen” Fund for East Africa.
• ISO 9001: 2000 accredited
• Deals done: About 350 in a bad year; over 700 in a good year.
• A current asset base of more than $330 million ($1=R9.70)
Business Partners: A risk financier
The Business Partners thesisTo have a development impact (unleash entrepreneurs
who pursue wealth for themselves, grow the economy, pay their taxes and create jobs for many)
…
in the SME sector (bolstering the “middle class”, the fulcrum of successful democracies and free markets)
AND
To make profits (thus ensuring a sustainable and growing development impact)
Business Partners’ finance parameters
• Investment range: $52 000 – $3,1 million ($1=R9.70)
• Sectors: Manufacturing, retailing, services, franchises, contracts, property, tourism, marine, etc.
• Type of Investment: Take-overs, MBOs, expansions (working capital, equipment), Start-ups, Real Estate
• Exclusions: Non-profit organizations, primary agriculture & on-lending
Business Partners’ track record
• Approved more than 70 000 SME financing transactions to a value in excess of $1,35 billion since 1981.
• Facilitated in excess of 556 000 jobs since 1981.
• Grew $18,4 million initial shareholders’ capital in 1981 … to > $250 million shareholders equity in 2013.
• An average ROE of 7,3% from 1996 to 2013.
• Current portfolio comprises more than 1 700 SME clients and more than 2 000 SME tenants
Investments disbursed(in $million: $1=R9.70)
Profits (in $million: $1=R9.70)We have made profits in each of the 32 years we’ve been around.
Return on Equity (%)We have, on average, provided our shareholders with a real ROE.
SMEs: Panacea for socio-economic ills?It’s very seldom – on any given day – that one opens a
newspaper without reading something about SMEs. It is highly fashionable and topical for academics,
politicians, financiers, seasoned business people, etc. to talk about SMEs … often waxing lyrical about
their potential to generate economic growth and solve the unemployment problem. But, nobody’s
really keen to “touch” SMEs because …
• There are much easier things to do in life than to “touch” SMEs
• There are much easier ways to make money or earn a living than to “dabble” in SME finance/assistance
One could make much more money from large (rather than small) deals!• E.g. a $1m deal vs a $100m deal
– Cost to source a lead, conduct due diligence, decide to invest and manage a small deal is at least as high as for a large deal.
– Let’s say, both small and large deal yields the same IRR, say 25% over 5 years
• How much (absolute $-terms) does one make in the small deal?
• How much (absolute $-terms) does one make in the small deal?
Yields to SME financiers may not be exciting!
• Most SMEs can’t pay more than the prime interest rate plus 10% (as an IRR to an investor) for their funding.
• The returns on an SME risk finance portfolio may be unexciting:
– IRR - 18.5% (P = 8.5% in S Africa)
– Less: Costs - 5.0%
Bad debts - 3.5%
Tax - 28.0% tax rate
– Yield to investor - 7.2%
Solving the SME finance conundrum
• Typically An entrepreneur, with good technical & business skills and viable (possibly high growth potential) business opportunity – approaches a financier for finance (say, $1m) but with little owner’s equity (say $100k) and no collateral.
• How do we solve this conundrum?
– Bank loans … (?)
– Asset-based finance … (?)
– Equity … (?)
– Risk finance … (possibly)
Disbursements per Finance and Product Type(R million: R9.70 = $1)
LegendDisbursements by Finance and Product Type
• TF - Term Finance
• TFR – Term Finance with a Royalty
• TFS – Term Finance with a Shareholding
• TFRS – Term Finance with a Royalty & Shareholding
• PFR - Property Finance with a Royalty
• PFS - Property Finance with a Shareholding
• PFEP – Property Finance with Equity Participation
• EI - Equity Investments
• WOP – Wholly-owned properties
Recipe: Sustainable SME risk finance, on scale• Patient shareholders seeking to do good, sustainably, via a
permanent vehicle (“evergreen fund”)
• Burning desire to prove that one could do “development” AND make profits.
• A single-minded, relentless focus on SMEs.
• Appropriate/flexible, workable & tailored SME risk finance solutions (products).
• We know that SME finance requires “more than just money”.
• Processes, systems, infrastructure, etc. which enables us to make risk finance solutions available to SMEs on scale.
• Attract, train, reward and retain people
– with a passion for entrepreneurs, entrepreneurship and entrepreneurial development
– who live and behave like investors (not like lenders)
