The world is changing fast and to keep up you need local knowledge with global context.
The Kisby Fund is bringing in investors who want to get good businesses back on track as they emerge from the Covid-19 crisis and share in the gains. Sean Emery, a driving force behind the fund, shares the details of how investors into the fund and businesses that apply for assistance can benefit. He notes that the Kisby Fund is not taking any of the many vulture investors circling SA companies that are under pressure. Instead, the Kisby Fund is attracting investors who are committed to helping businesses grow by providing fairly priced finance to foster sustainable entrepreneurship. – Editor
Mark sets trends wherever he goes. He’s often a first at everything. Great to work with, he knows, exactly what he wants. It’s very difficult to weaver him off that path, which is good to work with.
For those who weren’t in our webinar last week, last Thursday. In a nutshell, what is The Kisby SME Fund?
There’s been a lot of discussions around SME funds and this need to lend to SMEs. I think everybody understands that we’re in a climate where it’s going to be very difficult for our small businesses in South Africa. Everybody who’s reasonable and rational at the moment is saying, we need to structure funds differently to support the growth that South Africa needs.
Kisby is an initiative alongside lots of others that have been announced, there was a new one announced today, there is going to be ones pretty regular. What it is indicating is that there needs to be an alternative source for funding for Small Medium-Sized Enterprises over the next five years. Otherwise, our country just won’t grow where it has to grow. We aim to be one of those funds. We want to be very different. We have a different approach to it. What’s interesting is that we all going to marry private equity and banking together. I think that’s very important. You’ve got to marry these different sources to be impactful in what we need. You can’t just be like we were for the last 10 years.
You also apply technology, I think for me that was the differentiator.
Why I think what we do is different, we have to scale capital. Our whole difference comes from the way we are raising our funds, we have impact capital and senior debt. We using technology so that we can be highly efficient in how we get that debt, spread, and then I want to use the technology to make sure we can crowd in other capital alongside us.
Lots of these players in this market tend to think that it’s a competition. There is 4AX dept services that we can originate loans and analyse them with huge amounts of efficiency and accuracy and autonomy, with the technology platforms applying investment committee approach to it’s almost one on one. We can make a decision, which is this is something we need to fund. We think we can find it, we funded and then we make it open that other people may choose to lend alongside us.
In that way, our capital or the little capital we got from the impact investor is scaled by our senior debt and scale by all the people we can bring alongside us into this and say, look, we’re going to put our money where our mouth is. We prepared to give this person 100% of the money they need, but would you like to give them 5% or 10% alongside us? We just stand back a little bit and we try and scale and grow the capital. This is what you always spoke about Alec, is if we can use these technologies and use these platforms, we can correct the ability to really scale the lending capacity of these markets, but there has to be an initiate. That’s perhaps what I didn’t have in the past when we took these things, just marketplace. We didn’t have the initiator of these things, the market makers, you might call it.
How have you been received?
We have two different approaches. The first is when you go and talk to capital, they say, well, this is gonna be a tough segment, SMEs the next 5 years, how are you not going to lose the money because we all think there’s going to be a collapse of the market. On the other hand, we get people saying, this is a great opportunity and we should be making investments now because the time to invest is when others are running away and it’s a great return to be made. You’ve got this fear and greed.
Our job is to try and balance those two together so we can get the people who are the greed and try and get them to tone down the returns they might want from our fund and the ones that are fearful we have to say, look, we know what we doing because we going to have this private equity approach and the banking approach and not have these time frames which cause stress on companies. We’re also going to have support services or you support and some assistance, and we’re going to be able to carry these costs through. Marry those two together to get it rate, which is fair. It’s quite easy to now go out into this market, go to private equity clients as these funds are doing and say, look, there’s going to be distress. Give me some money, I’m going to go and I’m going to buy cheap assets as cheap as I can because there is stress, and you’re going to make a killing. You don’t want that kind of money in a fund of our nature.
So you’re not a vulture fund.
No, we’re not. I can see there are vulture funds all around us now that are coming up. There’s a statement on Bloomberg today which says that because of the company’s pandemic is going to be great opportunities, to acquire businesses which are under significant pressure. High-quality businesses are unduly punished and the virus will mean that we can take them out. That’s a vulture attitude, we will not have that. Therefore, we don’t want people to fund us who have that attitude and that’s what’s different.
When you can’t talk in this market to raise money for a fund, it’s very hard. You get the development capital, get the pension fund capital, and then you get this corporate capital, which is so used to spinning in that upper echelon of chasing the 20%, 25% returns from the stock market. You got to say, guys, you’ve got to take a little bit of that and we’ve got to put it into owns SME economy, that we can actually grow these engines of employment. Otherwise, we’re all going to be having these conversations but how many people are dying of diseases? Let’s try and put some in and we can protect the returns by being so much better to be used to be able to do and schedule things together. We really hope to achieve, we’ve been trying to do this for 10 years, we hope we can get better at it.
Back to the question, how have you been received? Not just the greed and fear, but have you found sufficient ears that are actually hearing you, when you say this is much bigger. It’s much bigger than making a quick killing.
Yes, we’ve definitely been well received. It’s been very interesting that there is an open mind is now that something has to be different. We have found in the conversations with our own government based or let call them development agencies, clearly understand that there’s urgency. I think we saw it in the way that national treasury responded with a 200 billion support to the banks and stepping in when they can.
We obviously limited in our economy about where we can step up, given the debt situations and what can actually participate. That process of knowing that your role as government is actually to be an impact, to be an instigator, to be a catalyst, is now getting more and more understood. That they can actually use capital markets better. Mark has been exceptionally good at talking around that logic to people that effectively to be catalytic, is your responsibility is not actually something you’re doing for the health fund. Catalytic because you have to be like that. Fewer people that are employed now means you have got liabilities, not assets. To create your assets as a country, you have to invest in and that’s been very well received.
That’s aligned with the entrepreneurial development state if you like. If you read Mariana Mazzucato, who’s kind of the high priestess now of economic policy in South Africa. She’s all about, the state invest heavily to provide the structure, the foundation, but then clever entrepreneurs can come along and make gazillions out of it without giving a heck of a lot back. She uses examples like Apple, Microsoft, Google and so on. Her thesis is the state should actually have some kind of ability to keep reinvesting because it also participates in part of the return. Which I think gets to what you said before, you need to leverage it, you need to be a catalyst. Need to almost use state capital as well, much more sensibly.
I have to be rude to some degree, some of the state capital that is in this input agency is exceptionally lazy. It just buys into existing projects, it funds senior debt and doesn’t do any innovation of itself. If you’re taking the 200 billion guaranteed national treasury debt, just give 1 billion to a fund and say, can you scale it to 5 billion? Now, 200 billion could have been a trillion if you had spread it out but the banks are never going to try and scare and leverage.
The banks will take it 200, they’ll bring it in and they’ll take the loans that got, lent to people who are the existing clients who maybe got into trouble and they got guarantees that they protected deposit takers, which is good. The way we planned to structure our fund is that the development capital partner will own the return and be able to participate in the return of some of those SMEs that are hyper-successful. That hyper success will breed more money for reinvestment into the bottom entity. In Silicon Valley, for example, why is there so much innovation? Because with the guys, it made a lot of money, reinvested the money they made.
These funds created by people who made a lot and then they continue to reinvest in the cycle. So if that capital can belong in these development agencies, they are the ones that are having the five or 10% equity portions that are a little bit of a carry in some of this funding over time. That certainly becomes exponential. They can reinvest that and still scale it. Mark uses the analogy, from a bank point of view, walk past a field and see a bull in a cow together and see that’s meet. Whereas now we are going past them and when they looking at this bull in a cow and I say, actually, that’s a herd. If I just give it time, water and feed I can create this explanation with the money and that’s it a very interesting approach in the mindset now. To not just see things as what is one budget to the next, but to see things as a 20-year cycle.
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