LONDON â When Servest founder Kenton Fine left for the UK in 2007, private equity partner RMB Corvest wondered if it was on the right horse. Ten years and a R10bn sale later, it knows it was. – Alec Hogg
This special podcast is brought to you by RMB Corvest, and in this episode the Servest story, from start-up to a R10bn multinational. Private equity is a long term game thatâs why it appeals so much to ambitious entrepreneurs whoâd rather have an equity partner than be forced to deal with the sometimes-fickle nature of bank debt or the volatility of âMr Marketâ and his friends, the other share market investors. When he took the fledgling Servest public in 1998, Kenton Fine was all of 29 years old, the youngest CEO of any company listed on the Johannesburg Stock Exchange (JSE). Four years and a hostile take-over bid later, with the help of African Merchant Bank he then took the company private again. What then followed was a hugely successful partnership between Servest and its private equity partner, RMB Corvest which had acquired the shares from African Merchant Bank a few years later. One, which was concluded to mutual satisfaction this year when the European group, Atalian, bought the company for a hefty ÂŁ540m. Thatâs roughly, R10bn. RMB Corvest CEO, Mike Donaldson, has got pretty close to Kenton Fine over the years. Let him kick-off by opening the first page of Fineâs fascinating Servest story.
I followed Kentonâs story for many years in the past, and then I think colleagues of mine at Corvest also followed the story, so I think they met Kenton when he still had a little waste business that was based in Durban. I think at the time he came to Corvest for funding and certainly the guys turned him down, and rightly so. It certainly wasnât the business that we came to know. But it just tells you, I think tenacity from an individual like Kenton, over the years and building something into a Servest business â it didnât happen overnight, so I think itâs all credit to the individual.
Kenton, 25 years ago or so, you did approach Corvest first time round and they turned you down, so why did you go back?
Well, Alec, in life you sometimes have to earn your stripes, I think, to be realistic and as an entrepreneur raising capital, which Iâve had to do my whole life. One of the earlier lessons is that it doesnât come easily and I think people want to see a track-record. You might be very excited about what youâre doing, in business and so on, but at the end of the day people sometimes need to see some traction track-record, momentum, and so on. I guess the industry type that I was involved in, which was specifically waste management, it was an interesting one for Corvest at the time, and they just felt that perhaps it was too capital intensive. They couldnât see where the net cash generation was going to come from. But as it turns out the business realised a very healthy value back in 1996 when I sold it, and it was, I think, a mistake admitted by Neil in later years but fully understandable. I was a pretty young, early 20-something year old at that time.
So it was a pretty shaky start but after that things gelled rather beautifully. Hereâs Donaldson again.
In 2006, I think it was, and I had known Kenton a few years before that while I was still at Investec. We had been talking about the service business and that it was a relatively small individual service cleaning business at the time, very focussed on cleaning. I think it was probably the early part or mid-way through 2006, Kenton approached us at Corvest to say, he had a shareholder, which was African Merchant Bank at the time, they were looking to exit and would we be keen to get involved in a relatively niche cleaning business. I think thatâs where it really all started. At the time, I think Kenton had the vision to make it a much more diversified business and go into other avenues like guarding and greens businesses and all the other auxiliary services that you can add-on, but that is where it all started.
And immediately you were able to help him through a couple of businesses in your portfolio that fitted really well into Servest.
Yes correct. So, I think we had some small businesses like Plants and Work, and a much, more substantial one called IHS, at the time that focussed on hygiene cleaning, and I think that together, obviously I think the appeal for Kenton, clearly at the time was he needed cash to buy out his partners but I think coupled with that the fact that we could also bring something to the table, not only cash, I think made the deal more sweeter for him. So, I think immediately after we did the deal we sold those two businesses in and then obviously, they consolidated that into the group and managed to grow both those businesses dramatically.
An important part of that transaction as well, was bringing in a BEE partner, which given the work that Servest does is pretty important if you want to land contracts in the public sector.
Yes, again, I think it was also quite early in the BEE expansion and I think, at the time, we were partnered with a group called Safika Investments, and we were their principal funder. I think it was an exciting time for BEE and certainly, I think Kenton and the service team was ahead of their peers at the time, so I think by becoming empowered they could then change a whole vast of different contracts and make them much more sustainable and obviously grow the business.
Kenton Fine
Corvest pedigree, quite frankly, has been known in the marketplace for a very long time. Anyone I ever spoke to always spoke highly about them and when the opportunity came to exit the funders, Africa Merchant Bank or AMB as it was back in 2006. We were looking around for an appropriate capital backer and Corvest was quite candidly right at the top of the list. I think the guys at Corvest, Mike Donaldson of course, had then come into the fray, being an ex-Investec guy, and we had kind of touched base a few times and they were top, or a priority to the list and I had a chat to them and we literally had probably an hour discussion. We knocked out a deal in high-level terms and I think it was 8 weeks later, at the max, we had consummated a transaction and they came in and backed us. They help provide some funding for our new BEE partners and Safika.
So you eventually did do business with them, even though first time round they turned you down?
Yes, absolutely. Another lesson in life, things take time sometimes, so sometimes you can have an eye on an asset, or an eye on a partnership, or an eye on something but it can take a long time, if youâre prepared to take a long-term approach, which generally I do in business anyway, but it worked out very well for us and for them.
When one looks back now, I think the 10 years has gone very quickly. Investment horizons are probably anything from 5 to 7 years. I think from an RMB Corvest point of view, we certainly like to invest for the longer term, probably closer to 10, but at some point, you need to look for an exit. So we always price the deals as if we were going to sell after 5 to 7 years. I guess one wouldnât even have envisaged what the business would become, and certainly what the UK part of that would become. So the Servest SA part was only one leg of the transaction and later the UK sprang from that.
That UK story is interesting because it started just after Corvest got involved.
It did, so it was literally probably about a year or 6 months after. As you can imagine, 6 months into the deal your CEO suddenly says to you, heâs now emigrating and disappearing to the UK. But in true fashion, he certainly wasnât retiring and I think the idea was that Kenton wanted to emigrate and he wanted to build something that side, which was just as exciting as the SA business, which is exactly what he did. So, literally after being there for a few months he found a little cleaning business called Eco-Clean, and this was a little business based in the North East in a little town called Bury St Edmunds and thatâs where it all started. A little business making roughly ÂŁ700,000 – ÂŁ800,000 of EBIDTA, but obviously, with the vision and using that as the base to then go and consolidate a whole lot more service businesses over there, and replicate what he did here. Obviously, he did that to the extent that itâs a bigger business that side than the SA business.
The next big development was your sale out of the SA operation to further enhance its BEE status, but at that stage you held onto the UK shares. Just take us through that thought process?
I think the sale of SA was also fortuitous in that, we found the right partner. We had BEE but it wasnât enough, and I think service business in SA needs to be empowered up to that 50.1% or 51%, and I think we had to make way, so it was almost inevitable unfortunately, we had to sell-out of the SA business or we had to find various other ways to structure it. I think coming across the partner that we did in KTH, I think proved to be a good milestone for the business. So to take it to something that is black controlled, I think was a great leg-up for service SA. We had been in there for some time and we were happy with the price and it was one of those win-win transactions that it actually worked out all very well. At the same time, just obviously realising that the growth in the UK hadnât materialised yet. I think it was a platform that was only starting to develop, and I think we made it very clear that we had a direct stake that side, with Servest, and I think that was where we saw the legs over the last few years, and thatâs exactly what happened.
Mike, that transaction in SA was in 2015. Has it actually helped the business?
Look, obviously Iâm not that close to it anymore, so obviously we get indirect discussion through Kenton, through the UK business. So I think it has. Again, I think the climate has been quite tough here from a growth point of view. I think it was a very defensive play, where if you are a 51% black shareholder you do stand to gain a lot of contracts or keep the contracts that youâve got.
Kenton Fine
It was a very clear, strategic transaction that we effected and Corvest were amenable to helping make that happen. They realised a very healthy return on the capital invested, so it wasnât a bad result for them at all. In fact, it was a very good one â the first part. Then of course introducing and bringing KTH as strong partners into our business was fantastic for the group. That relationship has been around now for 3 years and it continues as a mutually, beneficial and strong relationship.
But has it actually seen an expansion of the business, i.e., now that you are majority controlled BEE in SA, did that help to bring in new contracts?
Yes it has. The last 3 years has been quite tough economically, as you well know, it was in a SA and African market context, so perhaps if one has to take a bigger picture view on it, I think we would have struggled a lot more. The business has done okay, it hasnât shot the lights out in the last number of years, but itâs done okay and I think without that strong BEE credential I think we would have suffered unequivocally. In my mind, itâs been a very powerful and positive attribute of the group to have that 51-odd percent shareholding by KTH, alongside us as strong partners.
Then the UK business, which is now part of the Atalian Group, those exiting SA, did that perhaps sharpen the focus of Kenton and his team on what they needed to do in the UK?
Yes, very much so. It all falls under the one umbrella but certainly they are independent teams and they incentivise differently, so I think with Kenton focussed over there, 100% of his time, well not 100% but certainly 90% of his time was focussed on the M&A side in the UK and Europe. I think together with Rob Legge, who is the local CEO in the UK. I think it gave them the firepower and the focus to literally focus on that market. As Iâve said, because the SA side was completely run independently it did allow both businesses to enhance its management capacity.
When Servest went into the UK in the first instance, in 2007, you were along as the private equity partner to support them financially. Were you also involved in the last spurt, as it were, from 2015 to 2018?
I think very much so. Itâs hard to be based in SA, you certainly canât be operationally involved but I think where we get involved is on the M&A stuff. As a private equity client, Iâd like to think we donât interfere with management, we back good management teams and if the management team is batting weâd rather replace them than try to run it ourselves, to be honest. So I think from a UK perspective as well, I think some of the, and obviously giving them the firepower to make those acquisitions and giving them some sort of guidance, or talking to Kenton. The team is very competent there, and certainly he didnât need anymore expertise, but I think certainly, just from a little bit of experience from what we had seen locally, to try and emulate what SA had achieved over a longer period of time. I think that gave them the confidence to grow their thing aggressively.
At the end of the day private equity brings substantial, financial resources. You get different types of players that will bring different aspects. Some of them maybe a lot more operationally involved than others. Corvest was certainly not that sort of play, and that was the play that we were looking for. We knew best how to operate our business and this has been a tremendous show put on by myself and my broader team. Iâve got the co-founders of the group in there with me, Dennis Zietsman, Rob Legge, who operated my UK business. So itâs been a collective effort over the years, and Corvest knows that weâve had an incredible mix of skill set within the group, and they knew that in our particular case, quite candidly, they shouldnât meddle too much. Yes, of course, we had and always had robust debates and discussions around capital deployment and allocation capital, and funding, and best routes of funding, and so on and so forth. Those are ordinary, healthy, strong debates that we have but they let us get on with it and indeed, backed us fully. There never was an occasion where Corvest, and trust me, we did some pretty fowl things sometimes, or so it would appear at the time. In hindsight it looked like pretty straightforward stuff. But they always backed the team and were there, they were very supportive and yes, I think they played to their strengths and weaknesses with us. Itâs just an incredible, strong relationship and thatâs why I would certainly repeat that relationship if the chance rose.
Itâs quite a template isnât it, to take a SA business with a good entrepreneur, and to support them in their international ambitions. But itâs not one that necessarily always works out.
Yes agreed but I think the common ingredient here, which we found was South Africans. So, if you look at our UK business, itâs run by⌠Yes, itâs got UK individuals but the key individuals in there are people that weâve worked with before. Theyâre all SA experienced and thatâs where they grew-up. I think it certainly taught them coming out of a service SA platform, with these tough businesses to run. Itâs a people business. Youâve got thousands and thousands of workers and I guess, that experience has helped the guys in the UK expand to where theyâve got to. We wouldnât ordinarily back an independent team offshore but I think where itâs got a local link and weâve got partners that weâre comfortable with â I think that gives us the confidence to build from there.
And a relationship that goes back a decade but while Servest was growing in the UK, and doing further acquisitions, would it ever have looked elsewhere for funding or was it part of the deal that you always had first bite of that?
Yes, I think we certainly had an agreement that was first bite. I think that goes back to the relationship you have with your management team or the founders. So, obviously, Kenton I think he could have, and periodically did come across funding that probably would have been cheaper than ours, to be honest, and I think there were numerous occasions where we could have been marginalised and I think all credit to the team over there, they never did that.
Kenton Fine
Thereâs a lot to be said about loyalty. Iâm about to turn 50, so I still consider myself relatively young in a business sense, and Iâve always taken a longer-term view, being in business now for 30 years. So loyalty is pretty important, so long as itâs mutual and itâs respectful, and one thing that you have with RMB Corvest is loyalty both ways. There was respect, trust, and there was integrity. If youâve got to have a hard discussion, or a robust debate about something then do it. It was symbiotic in many ways as well because I think they learnt a lot from us as well. So, if I just reverse that for a second. I think the challenge to each other is a good thing. You canât judge a book by a cover, or its cover, whatever the case may be. So, we explored things like funding mixes, certain markets, product bonds and so on and so forth, which Corvest werenât necessarily holy enamoured or too excited about it, because thatâs not traditionally the way theyâve done things. But pushing each other, really exploring, trusting each other, having robust debates, itâs difficult to kind of put your finger on one particular aspect.
There is cheaper funding in the UK but that cheaper funding also comes at a cost, Alec, to be honest with involvement. I think Kenton was used to the way that Corvest operated. He was used to the individuals that was sitting on his board, and I think he liked that flexibility. He had predictability from us and I think thatâs what he went with in the end.
I guess loyalty as well. That runs very deep in the SA DNA.
Absolutely, and I think the loyalty and the management experience, going in the past, typically we find a winning formula and we back that 9 times out of 10.
Onto this year, and the big transaction â the exit and a valuation for Servest of ÂŁ540m. Thatâs over R10bn. A huge business from the one that you invested in originally. What return did you make on your investment over that period?
I think the returns, from a money side, it was astronomical. Obviously, I think it was close to a 30% annualised return over many years, and itâs a long period of time that we were invested on. Weâre not at liberty to disclose the actual quantum of cash deployed and then exited. But suffice to say, itâs one of our better returns over a long period of time, Alec.
A decadeâs involvement here, when you finally do sell out, what kind of emotions go through your mind?
It is bittersweet. It is one of those things that weâve all kind of grown up together and in our 30s together, and itâs been a long path. I think itâs been, not without its challenges, and Kenton will attest to that. But I think itâs been one based, as you say, on loyalty and trust, and I think mutual respect. So he understands our business model and vice versa. Yes, I think it is a sad day when you say goodbye, shake hands, and have a beer but at the end of the day, I have no doubt we are going to partner with Kenton in the future, with the business. Weâre looking at a number of opportunities offshore and locally, and Iâd like to think heâll play a hand at some part in some of those deals, down the road.
Corvest and I continue to think about certain things, so maybe Mike was being a bit more coy and maybe I shouldnât give too much of the game away. But you can rest assure that they are partners that I would work with any day of the week, and whilst the global environment is not necessarily their first and foremost strategic objectives, and thatâs where I see a lot of the opportunities today, coming out of the global environment, nevertheless there will be opportunities, Iâm pretty convinced that Iâm going to continue to partner with them. The guys have been fantastic partners. Theyâve got all the attributes that I look for in a partnership, and watch this space. Iâm pretty sure that if we have a discussion again in a couple of years youâll see some interesting things happening, Alec.
Is this one of the best private equity investments that Corvest has made?
I think itâs certainly up there. I think thereâs been a number and I hate to always single out one transaction. I think itâs right up there, with the like of something like Kwikot, which we exited early last year. Weâve also been involved in the Fidelity Group, with Wahl Bartmann over many years, and weâre still invested there. So I think it is certainly one of the most successful, in terms of an exit, and yes, I think itâs certainly in the top bracket for us.
How many of these entrepreneurs are you working with? Give us an understanding or a feeling of, clearly not Servest today but maybe Servest-type business in 2007 â how many of those have you got in your portfolio?
Currently weâre sitting on a portfolio of about 63 or 64 businesses as we stand today. So not all have got born entrepreneurs or born founders and some are professional managers that have come in over the years. But I would certainly say, out of the entire portfolio, probably half, say 30, have got the ability to take something to a different level. I think the most recent one we did was a business called Excellerate, which is also a services-type platform. Again, the individuals there have got the capacity to grow something, both locally and offshore. Itâs hard when one invests in a business to look at the entrepreneur or look at the MD, can he grow that business or what can it become? Some of them surprise you and the ones that you think can make it, and fortunately it becomes marginal. But yes, Iâd like to think weâre probably sitting on 30 or 40 entrepreneurs right now that have got the ability to emulate what Kenton and the team have done.
What have you learnt from this experience, this 10-year experience that you can apply when you engage with entrepreneurs, whose relationship is still in infancy?
I think the one is consistency, so if you can imagine from an entrepreneur and what he needs from you is consistency and he needs to know that the funder is always going to back him. I think where private equity businesses make mistakes is they panic and they panic way too early. Again, thereâs no straight line. Servest wasnât without its hiccups over the years and we certainly had enough discussions and strong discussions at boardroom tables but at the end of the day, we back the individuals. When things werenât going well we didnât panic. This is a long-term game and private equity â you donât get in one year and sell 2 or 3 years later. When youâre dealing with 10 and 20 years of investment horizons one has to take the good with the bad, and as long as youâre there in the bad times you work with the entrepreneurs to find the solution, I guess, thatâs what weâve learnt, is to be consistent and be patient, and the rewards will come.
When you say âwork with the entrepreneursâ do you get around a boardroom table and start thrashing out the challenges?
Yes correct. When things arenât going well itâs listening and become a good listener for the management team because half the time theyâve got the solutions. They know the answers but they want a sounding board and they want someone who, at the end of the day, is going to support them. And you can play devilâs advocate at a board meeting but youâve also got to back your team. I think when entrepreneurs and management teams realise that their principle funder is going to back them, I think it gives them the confidence to grow forward and not panic or second guess every, single move they make. I think thatâs where a lot of guys go wrong. Where you have some short-term hiccups and all of a sudden funding gets pulled, and management teams canât make a decision either way, and I think thatâs not good for business or for business SA, for that matter.
So how long do you persevere? Letâs just say, you make a mistake. You back the wrong team or you go into the wrong investment. How long would you continue for, because surely, it cannot be indefinite?
I think the answer to that, to be honest, is we continue too long, and weâve made mistakes and we will definitely make more mistakes. So we do continue and I guess itâs understanding what are the issues? Is it a structural issue? I think thatâs what we donât work out quick enough, whether itâs a management issue or just a company issue. I think where it is a fundamental industry structure that can either not be repaired or cannot be fixed, in the short-term. Those are the ones that quite honestly, you should rather pull the plug early on. Where itâs a management issue or a company specific issue, thatâs where you need the patience and to work with the management team to find the solution, and there is always a solution, whether itâs funding or finding new skills or just enhancing the management team. Thatâs what you need to look for. But I think the answer is quite honestly, we probably donât assess that quick enough and persevere probably a little bit too long in the industries where weâve been involved before, where the industry, there was no short-term fix. I think weâve lost a lot of money where if we probably pulled the plug earlier, it would have been a better solution.
Clearly it is a long-term relationship and itâs a lot of investment from your side as well so the selection criteria must be quite exacting. What would you have learnt from that side of your relationship with Servest that you now apply when you consider a new project?
I guess itâs that personal relationship with the founder or the entrepreneur or the seller, whoever youâre dealing with. I think you need to build up a rapport and you need to build up the trust very quickly. I think, without that trust, if you canât get that trust at the outset, then rather move on. Rather find another asset where you do believe you can create a rapport, but where youâre getting involved with management teams that thereâs this distrust between a funder and a management team â I guess youâre always going to struggle. I think when things go bad, youâre going to find the trust, both ways, is not going to work. Whereas, if you build up respect very quickly, and you can do that in part of the due diligence, you can do that in the courting phase, but I think if you can build up that mutual respect very quickly, work-out their ability, where their strengths and weaknesses because all teams have weaknesses, and as long as youâre all open with the weaknesses then I think itâs a winning formula. But where youâve got a management team thatâs too arrogant or doesnât believe theyâve got weaknesses and they know all the answers. Thatâs where youâre typically going to come unstuck. So I think the due diligence for us is much more around the due diligence of the people, rather than the business. Clearly both are important but the one will definitely drive the returns.
It all seems so simple, doesnât it? That itâs core business is all about people, especially so in private equity. Just a pity that people themselves are so complex, but as the incredible Servest success story shows us, respect, trust, listening, and discipline can produce some amazing results.
This special podcast was brought to you by RMB Corvest. Iâm Alec Hogg, until the next time, cheerio.
