Warren Wheatley: How Kisby Karmic credits cut costs of business loans

The Kisby Fund has found a unique approach to small business loans: Karmic credits. This means rewarding good behaviour with lower funding costs while bad behaviour results in higher funding cost. All of this will be based on assessing credit and actual equity risk. The financial viability of small and medium size businesses is seen as the core driver to a growth economy. Former Post Office CEO Mark Barnes, disruptive innovator Sean Emery and investment expert Warren Wheatley are part of the team behind Kisby, which is a fund aimed at providing a much-needed boost for a sector ravaged by the effects of the Covid-19 lockdown restrictions. BizNews founder Alec Hogg delves into the details of a karmic credit scorecard and what it means for the future of small business funding, in the second of this three-part interview with the fund managers. – Ronda Naidu


Q: The costs still look very high, the interest rate cost of 19.75%.

MB: Compared to what? They look very high if you’re an established business, where you are borrowing money from the bank at prime plus two, but you’re not an established business. You’re a small business crying out for funding and not able to get it. We think this price is in the appropriate expected bad loan losses and prices in the sort of yield that you’d have to promise to the institutions from whom we’re going to get the cap. We’re offering them a prime plus two. We think it is significantly below the lowest interest rate that small and medium enterprise (SME) loans are being serviced at, at the moment.

SE: This is an average, some people will qualify for less and some may be slightly more, but we are aiming to at least this 20%.

MB: I mean, the lowest alternative is 25% that we can find.

Q: What security do you need to access a loan of a half a million rand from Kisby? Is that 19.75% variable based on fluctuating interest rates?

MB: That would depend on what security you’ve got, but yes, it’s a floating rate, it’s linked to prime.

Q: What security would you need? It’s only a half a million rand that he’s talking about here.

SE: What we’re trying to do is be significantly less formulaic than the questions that are coming. A lot of banks or online lenders in the past have given you very specific criteria on this. We are looking for the investment committees, there are great people on this investment committees, to be able to look through things like the specific minimum security requirements of a specific loan amount. Most people don’t have that, so we have to be quite specific in how we can deal with it. That’s why we’ve got the investment committee to make the approach. We don’t have a formulaic answer to that question.

Q: Are new companies with confirmed long term and profitable contracts excluded? Is there no profitability test instead of history?

WW: Those are the kind of companies that would lend themselves to the second type of loan where we take an equity stake, if you can convince us of the merits of your business case. We’ve left the door wide open for anybody to try and access this capital.

Why we’ve put a unique set of skills around the table is to do just that, we want guys who are not just assessing credit. We have guys who are assessing actual equity risk. That’s why they are more private equity experts around the table than guys who worked in the back office of a bank. What we’re really doing is taking the business risk on you, in most cases more than credit risk, as far as the impact capital component is concerned.

AH: We talked about the loans, but on top of the loans is going to be a lot more that’s offered, which presumably is going to make those loans more creditworthy?

WW: When we sat around the table and we thought about what is going wrong in the sector? Is it a problem that is purely solved by throwing cash at it? The answer is a categorical, no. These SMEs need more than just cash. They need people that they can text at 12:00 at night when they can’t sleep and so we’ve set up an app where you can do that. You’ll be able to see if your particular mentor is awake at 3:00 in the morning, then you can spend 3 minutes talking through a problem that you need to grapple with the next morning. Those are the kinds of things that are inaccessible currently to SMEs.

From an Arena perspective, we can make up to R500,000 worth of advertising available to these SMEs. Suddenly the backpage of the Sunday Times, which was the preserve of the top 100 companies in the country, will become accessible to a small widget manufacturer in the Eastern Cape. They’ll be able to reach audiences unheard of before.

More importantly, we’re going to be saving up a virtual platform or virtual marketplace where these SMEs are going to be encouraged to trade with each other. It’s the local village, we need everyone to be buying from everyone else, not importing goods from the village next door. Quite simply, if I sell staples and you need staples, we can try and encourage you to shop in the virtual marketplace. We can use carrots as opposed to sticks to encourage that behaviour.

What we are doing is what they call a credit karma scorecard, where good behaviour is rewarded through lower cost of funding and bad behaviour is punished through higher cost of funding. Those things would apply to all the things we consider important in the country. While we won’t be having hard and fast rules, we will encourage good and bad behaviour through metrics that you can access and impact your cost of funding.

MB: To get out of that place, to get out of the bad you need to start embracing things like economies of scale. Like purchasing power, access at the unit cost of financial services, legal services, administration, backup and logistics. If we can create a SME marketplace, if we can outsource or create central business facilitation at a unit cost lower than what you get at retail as a small SME, that changes the fundamental economic model of the firm. This is an absolute.

In our country, the poorest people and the poorest entities pay the highest cost per unit of consumption. It costs the poorest person more for a minute of air time, apple or a cigarette that it costs the rich people because they can’t contract and they can’t buy wholesale. If you take our SME community, let’s say we do raise a R5 billion fund, that starts to create a portfolio of companies that can punch way above their weight and start getting the right input price so that they can start making the margins to serve mature capital and graduate out of the small place that they came from into the big place where the money is.

Q: What regulations affect the fund?

SE: There’s a host of them. We spend our life effectively make sure we understand all these regulations. Clearly, there’s the business of a bank which we’re not, we’re not raising money from the general public, we will be having a selective credit and institutional investors that will be in the fund. We’re not governed by the National Credit Regulator because we’re not lending to companies that are less than a R1 million turnover or to an independent entity.

This is effectively a standard SME lender as exists in the marketplace today, funded through institutional and impact investors and operational ordinary shareholdings. We’re not open for borrower applications yet. There is a place on our website where people can register their interest to become borrowers and we will be talking to them. We plan to open on 15 September for borrower applications. There’s a place to register an interest and to get hold of you when we are open and that’s live on the website at the moment.

AH: At the moment, you’re looking for investors, presumably if you aren’t open for borrowers?

SE: We’ve got investors that we are talking to directly at the moment in various stages. This is not necessarily a discussion open to the people on this panel to become investors. If there is someone here who represents an institutional¬† investor who is interested, of course, we would have a conversation with them. We are in the process of showing to quite a selective group of targeted investor bases.

AH: Assuming you end up with 100 plus clients, how do you provide them with meaningful input as a potential equity partner would?

MB: A lot of this is where you marry technology with wisdom, judgement and experience. I’ll give you an example when I was in the Post Office, we started talking about how we bank the unbanked. The China Post got it, they use technology extensively because they’ve got a much broader country than we have and they’ve got lots of tiny companies.

So, If you buy apples in the morning and you sell apples in the afternoon, we can technologically create a bank account that can only buy and sell apples, it can’t buy other things. There’s a technological while-you-sleep oversight capacity that is technologically competent today to have oversight across any number of accounts. They were able to go to an apple buyer or an apple trader, as long as you’re only buying apples and are selling apples. Technology comes in from that perspective. This monitoring of exposures is not new, non-performing loan graphs, behavioural statistics that derive out of the data.

Data is central to what we’re doing, monitoring the ratio, making sure that these SMEs for once centrally report because they’ve got the system. You’re not going there and the guy’s picking up his notebook and showing you what he sold yesterday, that’s part of the support function. I think technology is a big part of the answer and being able to see live, far more regular reporting than typically you would find from a company.

Q: Will you be focusing on specific industries or is the fund open to various options?

MB: We are not focusing on specific industries, although I would argue that the industries where SMEs don’t play. We’re not going to build a big mine or a set of roads or go farming. We might be funding suppliers to the mines who just don’t have enough working capital to apply for that supply contract. We might be enabling smaller players into bigger industries.

We’re not going to do industries if we don’t understand that, there’s going to be a big piece of filter which says, are you a decent corporate citizen? We don’t want to go into industries which we would regard as unsavoury but we don’t have a set of industries that we’ve sat down and said no to.

Q: What if your turnover at present is less than R10 million, due to the state of the economy now being faced with Covid 19 lockdowns and one’s projections only show R10 million turnover in, say, a couple of years time. Will the Kisby Fund look at this?

MB: The application process is quite thorough and quite technical, so apply. That process will spit something out at us, the decision-makers,¬† that’s a very rigorous process to start with. They might then come out of that, a process which says this company has got a history of this turnover, Covid has halved it and we would then look at that. The difference that we’ve been trying to communicate is that they are human beings as well that are married to the technology.

Q: How is the Kisby Fund link to 4AX stock exchange?

SE: 4AX is a subsidiary of the new stock exchange called 4 Africa Exchange. That’s a subsidiary business. It’s effectively 49.5% held by 4 African Exchange and 50.5% owned by RainFin. RainFin has put all of its technology and other technology into that business and that is effectively the technology hub and engine that’s going to be a services company, not only to Kisby but all other funds in South Africa if they actually need it. It’s becoming a fully-fledged end to end debt services company. It creates the ability for us to create the debtors being somewhat liquid and the ability to provide a service to us that we don’t have to go and invest in that platform. From a technical point of view, Kisby contracts and utilises the services of 4 Africa Exchange.

Q: SMEs often don’t have security.

WW: We haven’t asked for security. In certain cases, we going to feel that security is going to be an equity bet, in which case we’ll ask the SME for a share in the business. In other instances, your good behaviour will suffice in respect of security. What we are going to be asking and we’re going to be looking at each application individually, where there is a compelling reason to do so, we’ll take the steps needed to get you to the place you need to be. Our system will have a lot of no’s because we need to have some diligence around who we give cash to, because we are looking for institutional money, which typically means the final beneficial owner of that asset is the investor or saver.

We need lots of responsible lending, but our answers will most typically be maybe or yes. Where it’s a maybe, let’s look at some other things, let’s look at what other ways you can take away the risk of default. What if you, for example, agreed to only trade within our marketplace, would that help? Are there other ways we can look at this transaction to make it doable so that you can get some access to capital?

Q: How much capital have you raised so far?

WW: We’ve just launched the fund today, we’ve had one meeting so far and this is our first presentation to the public. The honest answer is nothing yet but we’ve got some expressions of interest that Mark, myself, and Sean will be hitting the road quite hard in the next few days.

Q: How much capital do you expect to raise?

MB: We really don’t know. We didn’t go into this thing not getting a sense of what the appetite would be for it. We’ve talked about a R5 billion fund which would be made up of R1 billion of impact capital investment and R4 billion of debt. I’d be surprised if it’s not bigger than that.

I don’t want to disclose who is speaking to who and how we’re doing it, but the government should have an interest in this because we are creating a tax base. The Unemployment Insurance Fund (UIF) should have an interest in this because we are creating UIF contributions. I can go through all the vested parties that have left this economy to its own devices and by inviting them into the formal economy, there are any number of intersections for established capital who have not gone there and SMEs who have not been found. That message is resonating at the highest level of capital that I’ve intersected with.

We’ve just started this, it’s just come together, but we’ve got a lot of people lined up who want to speak to us about their money.

Q: In regard to accessibility, how does an SME get funding from Kisby?

SE: They can go to Kisby.co.za to register interest, but on the 15 September there will be an apply button and they can go through the online application process.

WW: There’ll be an app, it’s web-based. Any instrument that plays with the Internet can access the portal.

Q: Would the investor or borrower give the nod to invest, or does the Kisby team decide on behalf of the borrower?

MB: The simple answer is we make the decision. We convince investors of our credibility, of judgement capability and of the systemic approach that we have and they invest within a mandate. We have a mandate with it, but we don’t revert to them for every credit decision. We operate within a given mandate which will have its boundaries, limits and areas of no-goes but ultimately, the investment committee of the fund makes those decisions.

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