wealth creation through group investments

Wealth Creation through Group Investments"

January 17, 2013

Tony Wainaina

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Table of Contents

1.  Background 5 2.  Why invest as a group? 9

3.  Investment group principles 20

4.  Critical failure factors 22 5.  Shifting mind-sets 25

6.  Creating savings to invest 27 7.  Administration & management 29

8.  Transformation: Beginning the journey 36

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1. Background •  Value of wealth held by investment groups in Kenya

(savings & investments) is currently approx. KShs100 billion (USD1.1 billion) according to Kenya Association of Investment Groups…… and growing.

•  One in every three adults in Kenya is a member of an investment group according to KAIG.

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1. Background •  Strong cultural impetus behind pooling funds as groups to

invest…strong fundamental affinity to save and invest. Very successful SACCO movement has been saving to borrow…

•  Investment groups play a major role in wealth creation but the efforts are by and large very fragmented and very disorganised…creating wealth significantly below potential.

•  To achieve the potential of becoming significantly greater wealth creators, investment groups must take a step back and address a number of fundamental issues and challenges.

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•  Hard work -‐ genuine commitment

•  Dedicated management teams

•  Strong governance structures

•  Clear strategic plan

•  Efficient decision making through delega<on to an IC that works closely with management for execu<on.

•  Commitment to raising capital for inves<ng

•  Strong deal pipeline-‐ Best deals brought to the group

How have successful investment groups done it?

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2. Why invest as a group?

•  Peer pressure works

•  Committed contributions - difficult to withdraw

•  Signed an agreement

•  Capacity to raise more money & invest in bigger projects

•  Combining several valuable skills

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(What’s in it for Me?)

* Average annualised returns over the past 5 years(10 years for the NSE)

Average Gross Investment Values for Holding Periods of 1 to 15 years (contribuAons stop aBer year 5)

These figures are not adjusted for inflaAon

Individual-‐type returns group-‐type returns

2. Why invest as a Group?

monthly contribution 15,000 (all figures in KShs) annlzed Year return* 1 3 5 10 15

0.0% current account 180,000 540,000 900,000 900,000 900,000

1.6% savings account 181,607 553,873 938,544 1,018,691 1,105,682

4.6% fixed deposit account 184,549 580,065 1,013,619 1,275,180 1,604,236

7.5% 91 day T-Bill 187,532 607,705 1,096,116 1,596,782 2,326,136

9.8% Stockmarket (NSE) 197,640 652,924 1,201,817 2,018,158 3,320,974

40.0% Investment Holdco 252,000 1,098,720 2,758,291 15,064,610 81,250,944

Case study 1: Unathi Investment Ltd. •  Unathi (“God is with us” in Xhosa”) was formed in 2007 when 1 lady came up

with the idea of bringing a group of women together to save and invest for re<rement. By the end of 2007, 19 women in their early 30s had signed up to became shareholders. KES1.4 million was raised by the end of 2007.

•  Monthly contribu<ons started at KES 10,000 (USD 150) and by the end of the first year -‐ 2007, total contribu<ons, which were all capitalised, stood at KES 1,405,000.

•  From 2007 to 2010, the value of their contribu<ons exceeded the value of their por[olio -‐ making a loss on their investments.

•  In 2010 they carried out their first detailed strategic planning workshop. By the end of 2011, the value of the por[olio (KES16.6 million)exceeded the value of contribu<ons (KES13.5 million) -‐ making a posi<ve return on their investments.

1. Case studies

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•  Invite like / business-‐minded individuals to join the group: Not everyone in the group needs to know each other from the outset. This approach improves the probability of a business rather than social agenda being adopted from the very beginning.

•  Learn from failure, and move on: A`er the failed investment aaempt that lost them a substan<al amount of money Unathi learnt the meaning of being well prepared to borrow from banks.

•  Develop and implement a strategic plan: Unathi’s first comprehensive strategic plan was developed in early 2010. The group started implemen<ng the key result areas almost immediately and within 24 months, had achieved a por[olio value greater than the total contribu<on levels, for the first <me in their history.

•  Professionalise management: Disengaging the shareholders from the direct management and administra<on func<ons of the group was key to ini<a<ng Unathi’s transforma<on between 2010 and 2011.

Learnings from the Unathi case study 1. Case studies

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•  Maintain a strong savings culture: Most members have maintained monthly contribu<ons from the beginning -‐ even in the difficult years when the viability of Unathi as a long-‐term investment vehicle was uncertain.

•  Corporate Governance: Over they years governance strengthened gradually, and in 2010 a board of directors was cons<tuted with terms of reference for the board and for the board commiaees.

•  Leverage your capital base: Even a`er a failed first aaempt to borrow investment capital in 2009, Unathi persevered and succeeded in securing a loan facility in 2011 for the purchase of 3 proper<es. Leverage (borrowing money)was key to growing their por[olio value by almost 150% between 2010 and 2011.

Learnings from the Unathi case study 1. Case studies

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Case study 2: •  Trans-‐Century is recognised as probably the most successful investment

group in East and Central Africa.

•  Origins and development over its 14-‐year history clearly demonstrate the real poten<al of home-‐grown investment groups to transform into a large, regional, and profitable investment holding company.

•  At the beginning, a sugges<on was made to form a group whose collec<ve skills and networks could be leveraged to do what would be far more difficult for an individual to achieve.

•  50 prospec<ve members (inclusive of the original 7) were invited to invest KES500,000 each; 29 accepted -‐ ini<al capital of KES24 million was raised. By December 31, 2011 the total assets of the company stood at KES21.7 billion.

1. Case studies

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•  Professionalise management: A high quality full-‐<me compe<<vely recruited management team was recruited in line with the 2006 strategic plan.

•  Devote substanAal quality Ame to managing your investment group: Before engaging full-‐<me management, Trans-‐Century’s chairman and vice-‐chairman devoted over 50 percent of their <me to managing the affairs of the investment group. High quality service providers—in accountancy, audit, tax, company secretarial services, legal maaers and corporate finance—were engaged from the beginning.

•  Develop and implement a strategic plan: Ever since Trans-‐ Century began to develop strategic plans, the implementa<on of these plans has been closely monitored and the plan has been reviewed every 2-‐3 years.

Learnings from the Trans-Century case study 1. Case studies

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•  Build long-‐term value: Trans-‐Century has consistently pursued a strategy of buying, driving value and holding strategic investments.

•  Think big: Trans-‐Century has pursued an aggressive investment expansion programme across the African con<nent. They evolved into a public company and eventually listed on the Nairobi Stock Exchange.

•  Learn from failure: A`er par<cipa<ng as a minority investor with minimal rights in the Castle Brewing Kenya Ltd. venture that folded a`er only 4 years, Trans-‐Century decided to focus on acquiring majority stakes in companies they could acquire full informa<on on before deciding to invest, and control upon investment.

•  Bring the best deals to the group: There is an unwriaen agreement among the founder shareholders to bring aarac<ve investment opportuni<es to the aaen<on of the group.


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•  Leverage your capital base: Trans-‐Century pursued an investment funding approach that relied quite heavily on money borrowed from banks. This enabled them to achieve a significantly larger investment por[olio than they would have, without dilu<ng their shareholdings or commijng addi<onal capital -‐ which would have been the case if they had relied only on share capital.

•  Cash is king: It is important to focus on cash genera<on (e.g. East African Cables is one of the NSE’s best dividend payers in history). Too many Investment groups <e up their capital in non income genera<ng assets (eg. undeveloped plots of land) for too long.

•  DiversificaAon: Trans-‐Century has diversified geographically (now in over 10 countries), by sector (power, transport and engineering) and by customer base and product.


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Trans-Century at a glance Controlling interest

Minority stake

Pende Electrical, Zambia

Cableries do Congo, SPRL

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3. Investment Group Principles

•  Commitment (financial & non-financial)

•  Vision

•  Governance

•  Trust

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4. Critical Failure Factors

1.  Not shifting your mindset: short-term not long-term; small not big

2.  Not having a documented purpose and vision (strategic plan)

3.  Letting all the members, not a smaller board drive the group: Not separating ownership from management

4.  Not professionalizing - management & execution of investments. Relying on office-bearers to do everything

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5.  Only save/contribute what you can afford to lose

6.  Not respecting the distinction between business and friendship

7.  Not formalizing / legalizing the relationship

–  Shareholders agreement –  Auditor, company secretary

(submit annual returns) –  Issue share certificates

8.  Weak leadership

4. Critical Failure Factors

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5. Shifting Mind-Sets From To

[Social] Investment clubs & merry go rounds

[Business] Investment holding companies

Small

Big

Why?

Why not?

Short-term get-rich-quick

Long-term wealth creation

Foreign direct investment

Local direct investment

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6. Creating Savings •  Saving to borrow (for short-term) exists - SACCOs.

•  Must develop a culture of saving to invest (for long-term)

•  Change mind-set from of savings as “spare cash” to “paying a bill, school fees”

•  Your family and you & are the most important person to you - so pay yourself first

•  Develop the habit of saving - repetition and sacrifice

•  But results must be seen along the way (performing investments) to encourage continued saving

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8. Administration & Management of the Investment Group

MUST DEVELOP A STRATEGIC / INVESTMENT

PLAN FIRST!!!!

Before engaging or outsourcing full time management and administration, the investment group……

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Why do we need Full Time Administration & Management?

q Not-‐‑For-‐‑Profit social venture or a For-‐‑Profit business

venture -‐‑ DECIDE!!

q  Every member has a full-‐‑time paying job

q  Spare Time Commitment = Spare Change Returns

q No company has every succeeded with part-‐‑time management


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A. Administration ……of Investment Groups

i.  Convening and recording meetings ii.  Record keeping iii.  Accounting, banking, filing returns iv.  Transacting with professional service

providers v.  Communication


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B. Management ……of Investment Groups

i.  Investment portfolio management ii.  Sourcing good quality investments iii.  Performing high level due diligence iv.  Professional service providers v.  Preparation for board/commiOee meetings vi.  Positioning the Group as a preferred

investment partner vii.  Implementing your strategic plan viii.  Communication


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C. Execution ……of Investment Transactions

i.  Formalizing your decision to invest ii.  Funding the investment: equity & debt iii.  Documentation confirming final investment iv.  Professional service providers v.  Investment closure checklist vi.  Legal considerations & risks vii.  The property investment execution process


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Early

Mid -‐ Level

Mature

Starter Toolkit

FormaAon &

Structuring

1 3 4 6 7 9 12 Investment

Planning AdministraAon & Management Own Management

Level 1

Level 2

Level 3

Starter Toolkit

Designing the appropriate structure for your group based on your objec<ves

F & R

Focuses on iden<fying effec<ve investment strategies according to the group’s risk appe<te and financial goals.

Investment Planning

Affairs of your Investment Group placed in the hands of a full-‐<me, dedicated team of professionals

A & M

2 5 8 10 11

Designed to establish an investment group with a strong, well-‐structured founda<on

Investment Group Development Path

Port

folio

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e

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9. Transformation: Beginning the Journey

Establishment FormaAon & Structuring

Strategic Planning

AdministraAon & Management

Stage 1: Stage 2: Stage 3: Stage 4:

•  There are no shortcuts - follow the process

•  Invest heavily in the process - the outcome will take care of itself

Wealth Creation through Group Investments"

January 17, 2013

Tony Wainaina

wealth creation through group investments

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