Inside the Kamoso deal: Botswana’s biggest private equity transaction yet

This special podcast is brought to you by RMB, and it’s a warm welcome to Ewan Gray from RMB Ventures. Ewan, you guys have just concluded a transaction with a company called Kamoso Distribution the biggest private equity transaction yet in Botswana. Before we talk about the deal, RMB Ventures itself, how long have you guys been around?

RMB Ventures has been around for a long time. We were started in the mid-90s as the equity division of Rand Merchant Bank and for many years we were doing transactions in SA. Then for the last four to five years, we have extended our area of interest to include transactions across Africa predominantly in the countries where FirstRand is present. The Kamoso deal is a very exciting step forward in our African expansion plans.

What’s particularly interesting with Kamoso is that you, together with Investec Asset Management, have replaced other private equity partners in this transaction. Just unpack the whole thing for us.

I wouldn’t say it’s unusual. In a number of our transactions in SA and elsewhere on the continent, we have collaborated with other private equity players in order to do deals. So the private equity model across the continent is very much collaborative. Working together with Investec on the transaction has been really great, and we’re excited to work with them.

We bring different perspectives and views on investing, which ultimately will be good for Kamoso as well as good returns for us.

Ewan Gray from RMB Ventures

The previous private equity players were Development Capital Partners and Standard Chartered private equities, so coming from outside of the African borders, it’s a little bit of a homecoming in a way.

We’d like to think so, although Standard Chartered has got a presence in Botswana and a long history there, it is nice to have the business managed by private equity houses that are very much based in SA (both RMB Ventures and Investec Africa Private Equity).

Tell us about Kamoso Distribution and the size or the scale of the operation.

Kamoso is a very interesting business. In the Botswana context it’s a very big and diverse business. While there are some common threads among the businesses it’s a collection of nine different operating businesses that spans everything from the biggest liquor outlet in Botswana (Liquorama) to the largest hardware chain by footprint in Botswana (Builders Mart). It also has several manufacturing businesses that range from sorghum meal to samp and beans. They also bottle water, make toilet paper, tissues etc.

The other component of the business is an import and distribution leg that is importing consumer staples such as baked beans, soap and washing powder. They also distribute medical supplies into Botswana via a separate business called Mediland.

Flag map of Botswana

The business has been very much Botswana focused in the past, but increasingly Kamoso has looked elsewhere to grow the business in SA and Zambia. We supply products into Zimbabwe, and to a lesser extent to Namibia and Mozambique. So it’s a diverse collection of businesses with consumer staples for the African consumer being the common thread.

What exactly does a private equity partner bring to the party for a company like this?

We believe that the private equity partner brings a great deal to the party. Our philosophy is to back a management team to run a company. We are however not getting involved in the day-to-day operations of the business Kamoso has great managers who will do that. Instead we are a strategic sounding board.

We have interests and exposure to a vast array of businesses across many countries. It is this vision that allows us to bring information and strategic thinking of value to a business like Kamoso.

We also help with optimising the capital structure, working with, and making sure that the managers and employees are correctly incentivised. I want to say it’s a light touch but a very important touch to a business like Kamoso but we’re not there running their business. That’s done by a very competent team on their side.

Given the fact that Botswana’s economy has been growing, well certainly a lot faster than SA’s has, and with other sub-Saharan countries also enjoying a similar improved growth path and hopefully Zimbabwe soon. Is this an area that you’re looking at, in other words, almost targeting non-SA business in Africa?

I wouldn’t say we’re specifically targeting non-SA at the expense of doing deals in SA. We’re very active, both in SA and across the continent. However we do believe in the African rising story – especially in certain sectors. Being exposed to the consumer in Africa through Kamoso is a good story and something that we want to pursue.

Liquorama, which is a significant player, as you said the biggest in Botswana in liquor retailing. Then Builders Mart and its distribution businesses. It’s almost a mini-conglomerate. Is it looking to consolidate in any way or does it want to move into even more areas?

A mini-conglomerate is probably a good way to describe the business. Are we looking to consolidate? We’ve got a strong position in Botswana and we certainly want to consolidate that position within Botswana in the space that we operate.

I don’t think we would look to add something completely different to the group, but within places like Zambia and SA, where we’re still relatively small, I think we would like to look at opportunities to grow in whatever shape or form that takes.

All right, and now when you step back a little bit from the business and it did have a relationship with Choppies, which is a retailing company that South Africans are now aware of because the Botswana retailer is listed on the JSE. The original transaction with the previous private equity partners was done with the owners of Choppies. Is there still a relationship between the two businesses?

There’s still a very important relationship between the two businesses. Choppies is an important company to the Kamoso Group. Not across all of the businesses but across some of the businesses. It is a big customer and we have to work very hard at servicing Choppies well to ensure that all their needs are met. In the same breath, Choppies isn’t our only customer. We service many guys in Botswana and in Zambia and we will continue to grow both sides of the business for, we believe, everyone’s mutual benefit.

Are there any similar type businesses in SA? I’m just wondering from the outside, when you look at Kamoso, is there a similar template? Is there a company that operates in the same way in SA?

In SA not so much, nothing jumps to mind, but if you look at East Africa and perhaps even in Zimbabwe, there are businesses with similar histories. They’re much bigger than Kamoso, but the combination of manufacturing, retail and distribution businesses is something you’ll certainly find in Kenya and Zimbabwe. So, it’s not a unique model. We think it’s a model that has worked elsewhere and there’s no reason why a player like Kamoso can’t become a regional champion in this conglomerate type shape.

So what’s the next step in this development of the company, given that it’s now got you guys and Investec as financial partners, well as owners rather than just financial partners, of course?

There are many plans in the pipeline. I think first and foremost, we’ve got a good base in Botswana and we need to work to strengthen and consolidate it. There are a number of organic growth opportunities in Botswana, and we need to execute on them to become a regional player.

Step one is probably Zambia and SA. Step two is perhaps Zimbabwe, Namibia and Mozambique. We think that the products that we sell are fairly easily exportable to a place like Zambia. Manufacturing consumer goods like toilet paper, samp and sorghum can work elsewhere – particularly in Zambia. We’re also very excited about the opportunity for the likes of Builders Mart and Mediland to be added to the Zambian market.

Zambia’s retail sector is still very much in its infancy and developing and we believe the likes of Builders Mart can really service that market well and make a difference. In SA we’re playing with the big boys but we do think there’s a niche for a guy like Kamoso to service local customers in SA. We as shareholders certainly support a growth plan across the region which we would like to see happen in the next couple of years.

Is there a time horizon on the investment?

We generally hold investments for a period of five, six or seven years, even up to 10 years, should the need arise. We don’t go into any investment saying, after five or six years we need to exit. We wait until we think the time is right. We believe that there’s a long path to walk here so there’s no specific timeline. One day we’ll exit but we’re in this business certainly for the foreseeable future.

And the kind of exit, presumably that will be to a stock exchange listing or something of that nature?

The stock exchange listing is one option and that is certainly available to us. Other options are of course open to another private equity firm or to a trade player. Time will tell in whatever number of years it is. We’ll work out what the best option is, but certainly an IPO would be one of the options.

Now it’s an interesting philosophy that you adopt to bring in local partners and indeed, in this company, management as well. Just unpack that for us.

It’s an RMB Venture philosophy across the board. For us, one of the key ingredients to a successful private equity deal is the alignment with your management team, and in this case, managers own equity in the business. Additional managers will be brought into the equity of the business in time. We find that alignment really drives shareholder returns and it’s good for the business. So, in the Kamoso deal the managers are shareholders. From a local partner perspective we believe that we should have local partners in the shareholding base in the countries that we operate in. In Kamoso’s case, there is a significant local partner shareholding, which we think is good for the business and good to maintain that strong connection to Botswana.

Am I correct in saying that between yourselves and Investec Asset Management you hold 72%?

Give or take yes, it’s around 72%.

So the balance then would be with local investors and managers, which positions them to be pretty well incentivised because this is deal worth hundreds of millions of Rands?

While the specific deal metrics haven’t been disclosed, it is a big deal. In the Botswana context, we believe that it is the biggest private equity deal that’s ever been made there.  So yes, the percentage owned by the management team and by local Botswanans is material, and very good to see.

Just to close off with, on this transaction, how long did it take you to start talking and to in fact, fulfil it?

Private equity deals are never quick things, as you probably know. We’ve known Kamoso and the management team for quite a couple of years. We liked the business and watched them at a distance and kept in touch.

Our detailed interaction started during the course of last year, so it took time to get to the close of the transaction. This is however a big and complicated business and there was a lot of work to do. We worked on it for a good number of months to get to closing in October 2017.

Presumably you’re also scouting around for similar deals in the sub-continents?

Rand Merchant Bank (RMB)

Absolutely, we’re always on the lookout for deals. There are several countries besides Botswana that really excite us. We are looking across predominantly Southern and East Africa for similar type deals. Deals where businesses are market leaders where you’ve got strong management teams, where you’ve got a demonstrated track record of generating cash. Those are the kinds of businesses we’re looking for and we’ve always got our eye on the market.

Any particular industries?

RMB Ventures looks across industries. This one is obviously in retail and manufacturing, but we are in businesses across all sectors. I would say the only industries that we’re not active in would be mining and agriculture, which are sector that we can’t invest in. Other than that, we look at everything.

I presume you’re going to be going off to Gaborone or to Botswana, and having conversations in your daily life from here on out. The kind of returns that one would be looking for in a private equity investment like this, if you were to take it over a five to seven-year period?

Yes, we’re on a plane to Gaborone or Botswana all the time. Luckily it’s a short flight from Johannesburg so it’s not too difficult. It’s a great place to visit as well, so there are no real challenges. In terms of the returns we look at. It would be similar to any other major private equity player across Africa. We have a hurdle rate that we need to return to our shareholders and we think in this case, we should be able to do that. The growth prospects for Kamoso are good and we think that if we can successfully execute on a Zambian strategy, we can build a bit of scale in SA while looking after the Botswana base. There’s no reason why this shouldn’t deliver good returns for our shareholders and we’re certainly very excited about it.

Ewan Gray is a transactor with RMB Ventures and this special podcast was brought to you by RMB.