Getting SA back to work after Covid-19: Does your business qualify for Kisby Fund finance?
The Stats SA Quarterly Labour Force Survey for the first quarter of 2020 indicates that there are 7.1 million unemployed people in South Africa. This was before the country imposed lockdown restrictions to curb the spread of Covid-19. There is little doubt that this figure will increase dramatically. Industries across the country have already started retrenchment processes, affecting the livelihoods of millions more, leading to a higher reliance on state grants. But it doesn't have to be this way. The newly established Kisby Fund believes in creating cash flow. This, in turn, will help small businesses to create jobs and contribute to the taxpayer base. BizNews founder Alec Hogg talks to founders Mark Barnes, Sean Emery and Warren Wheatley about the virtuous cycle of small businesses and job creation and how the Kisby Fund has been conceptualised to fire up small and medium size businesses in need of competitively priced financial back-up. – Ronda Naidu
Q: Will sole traders qualify?
SE: Unfortunately not. Sole traders fall under the lending mandate or the National Credit Regulator (NCR), and we are not lending to people that are in that mandates. They would have to register as a Pty.
Q: Will you be able to fund small and medium enterprises (SMEs) operating in townships?
WW: That would be our preference to lend to the township economy. Not only townships, but we are also using our media reach to make sure that as many of the informal economy participants can access this capital and that talks to the rural Eastern Cape, the townships and locations across the country. Mark keeps saying what's a better spend, to take a R1 billion rand and pump it into a state-owned entity or to take that R1 billion and start a thousand township businesses. That's the approach we are taking. It's to get to the guy who can't access traditional capital markets.
Q: Who will be the typical investors into the fund?
MB: This is not a fund which has been designed by trying to define the boxes. This is a fund that is being designed to try and beat an obvious need. I don't know who the investors are going to be, I know who we targeting. All of the investment capital in South Africa needs to take a portion of its available capital, not only because it's a virtuous thing to do, but because it's an economically resilient thing to do. Take it out of the formal markets and put it into these less established markets which have a much higher growth plan.
If I see another building going up in Sandton instead of another business being built in Alexandra, I'll feel ill. We are sitting here reinvesting in the top of the pyramid and that is a fundamental flaw which is going to come back to bite us. Let me be clear, we are seeking to invite people back into the real economy. We are not looking for people to circulate money at the top of the current capital pyramid because we actually don't think it's in their best interest, good citizenship aside.
We are going to the classical owners of capital, the classical managers of the institutional capital, the big pension funds, the big storage of capital, the banks, whoever it might be, and we say to them, let us invite you into the future and stop lending money amongst each other because that is creating an economic division in our society which will fundamentally destroy your established business. In your own vested interests, for goodness sake, take some of this capital and stop buying traditional shit with it and start buying real growth.
We don't have a standard definition of where we're going to go, we are going to go to everybody who's got a huge balance sheet and we are saying, a piece of your money needs to go to create the middle economy in our country.
AH: This is a matter of interest, would you go to private offices as well?
MB: Sure.
AH: What would you expect them to be injecting, what would be the minimum?
MB: I'd be surprised if anyone investor injects less than R100 million or something, but I don't know. I think we're going to end up with maybe 2 or 3 anchor investors who go, if you just raising a R1 billion, we're going to take it all. This is not a big number.
I hate the word billion because most people don't understand it. We're talking about what proportion of investable capital is going to the economic engine of our country. If we take that, we're going to have a tiny, tiny percentage, which is going to change the prospect of economic dignity for SMEs and economic survival for an established business.
Q: Will applicants have to be black economic empowerment (BEE) compliant?
MB: We haven't got that in our scorecard at the moment.
Q: Will SMEs require a sound business plan to access the finance?
MB: Yes, the application process will seek out that business plan. By filling in the application process, you will demonstrate to us your business plan.
WW: That business plan doesn't need to be a polished pdf document that you need the latest Macbook for. We require that you have a plan but we expect that the guys who formulate the plan, don't have access to a team of creative designers who put together a 40-page investment memo.
Q: Is this only for the Eastern Cape?
WW: No, it's our entire country.
Q: Would livestock farmers be able to apply?
WW: There are no hard and fast rules, and I think that's the thing we need to get clear. What we want to do is create jobs and preserve jobs. If your business meets those criteria, then please apply.
Q: You just mentioned that you want to assist the typical township trader, but also stated that you won't be willing to subsidise sole traders. Would you expect these sole traders to register as Pty limited companies?
SE: It's a degree of size for us. We will not set up to be lending effectively to an individual in the terms that the individual is governed by the National Credit Act, and some very different lending approaches. It's a very different set of lending rules. We do need businesses to be established, we have to protect the capital. When we say a township business, we didn't assume in our mind that every township business is a sole proprietor and the small guy. We know there are large businesses in the townships as well.
Every person employed by an SME means that we take out of that social grant system, decrease the liability of the state and increase an asset of the state as that person starts paying tax and that entity starts paying tax.
Q: Are there any plans for individual investors in future? I guess at ,R100 million it is going to be a small pool.
WW: It's quite complex to take money from the public, there's a lot of legislation around that. We would absolutely love to have opened up to the public because you can then crowdfund. It's certainly the direction we will be heading towards and we're going to be investigating quick, cheap, easy ways for the public to get involved but we're not there quite yet.
Q: Mark is so right about the reinvestment of capital into the top, into the pyramid. How does he see the government encouraging this?
MB: The government's got a choice. Either we invest in the growth of our people and their economic prospects or we rescue them when they fail. I was quite involved in the social grant payment system in my time at the Post Office. Our primary objective there was to take away from the private sector, the money they were taking out of that ecosystem because I regarded social grants as a service, not a business which is a service of the state.
The social grants pay when I last looked was R200 billion a year, ignoring Covid. That is not social development. That's a social risk. Every person employed by an SME means that we take out of that social grant system, decrease the liability of the state and increase an asset of the state as that person starts paying tax and that entity starts paying tax. I would argue that the state has got a huge vested interest in creating employment from a purely monetary income statement point of view. I would see them as seriously encouraging this kind of behaviour.
AH: You said that the applications for borrowings will only be opened by 15 September. By that point presumably, you'll have a very good understanding of how much money is in the fund. You've been talking R5 billion. How confident are you that you'll get to those kinds of figures?
SE: Our structure doesn't require us to have all the money on a particular day. You can start and you roll this. It's not something which is closed and then starting. You don't want to be sitting with R5 billion on your balance sheet and not having lent one cent. We don't expect to have all of our capital to deploy upfront, you deploy it as you grow your base.
WW: 100% confident we will raise the money. If the country and our institutions don't have an appetite for this, I'm living in the wrong country and in a parallel universe. I'm that confident. We really are thinking outside the box. We see the absolute need and if we've gotten this wrong, I need to seriously be introspective about what I'm thinking and reading and watching on TV.
MB: I fully support what Warren has said but let me say it further. I think that what we are looking for is such a small piece of the pie. If you look at the amount of money that's ideally circulating at the top of the capital pyramid and you just take a fraction of that and convince people how it's going to circulate back into their businesses by creating clients. Our ambitions are small and this thing has got the propensity to be 10 times the size that I'm talking about at the moment. And I think what's gonna happen, like it always does, is we've got to find one or two blocks of capital that are convinced and want to be the lead steers and the anchor tenants. Our biggest challenge, we don't want to draw a whole bunch of money upfront that we can't spend because we're going to get the money market rate on that and that doesn't really work for us. We really don't know, I think our ambition is modest and the need that we are seeking to fill is a huge multiple of this bit of capital that we started to raise.
AH: Thank you for being with us today, It's been a real pleasure to be in on the ground floor, if you like, on a very, very exciting project that we'll be following with quite a lot of interest over the next few months. BizNews is a media partner in Kisby. We are very excited about the fund, we think that it's going to be a game-changer in South Africa and we are privileged to be part of the process of giving it exposure.