For all that we talk about small business in South Africa, we often overlook one of the most prominent small business sectors in the country – the informal taxi industry. Although minibus taxis are a familiar sight on South Africa’s roads, the inner workings of the business are not generally well-known. In this interview, Transaction Capital’s David Hurwitz offer an insider’s look into the business. Transaction finances would-be taxi entrepreneurs, helping them to buy their vehicles and the licenses they need – not drivers’ licenses, but route licenses issues by the Taxi Association – and so they need to understand the industry. According to Hurwitz, the company’s knowledge of the industry gives it a competitive advantage. The company is also involved in debt collection, and its share price has fallen this year amidst worries about the country’s lending markets. – FD
DAVID HURWITZ: I’ve actually been with the business since it was formed. Transaction Capital formed in about 2007 and I joined the founding shareholders in 2005, when we accumulated several of the assets, with the main ones being MBD and SA Taxi. Although I’m new to the CEO role, I’ve been with the business for about ten years.
ALEC HOGG: How were you pulled into Transaction Capital?
DAVID HURWITZ: I’ve always been an entrepreneur and I decided to study with accountancy, which sounds a little bit like an oxymoron because accountants aren’t entrepreneurial.
ALEC HOGG: No, not at all. If you don’t understand accounting, how can you understand business?
DAVID HURWITZ: Well, that was exactly my view. I took the view that accountancy, or to get my CA, would give me the best business background and it would enable me to enhance my entrepreneurial skills. I was always very interested in developmental finance and both our main businesses have a very developmental angle to it. When I met the founding shareholders, I realised that I could use my entrepreneurial skills to actually build developmental businesses in the financial services space.
ALEC HOGG: We can explore a bit more there. Is it the Yunus Muhammad type of model, which attracted you to developmental finance in the first place?
DAVID HURWITZ: I wouldn’t say it’s specifically that model, but what we do want to do is finance small business. If you look at our SA taxi business, there are about two-hundred- thousand taxis operating on the road. It’s an informal and under-regulated market, a market which, historically, has been unable to attract traditional capital into that space. We saw that there could be a huge developmental impact, firstly, to provide finance to black entrepreneurs to start a new business, and then secondly, to improve the public transport infrastructure. As we all know, the taxi industry accounts for about 80 percent of public transport and most of those vehicles are old and unsafe. Our objective here is to lend money to people where the formal sectors aren’t participating, to allow them to buy new cars and run businesses.
ALEC HOGG: How many of the drivers actually own the vehicles they drive?
DAVID HURWITZ: In our fleet, our average client has about one-point-three vehicles each. In this business, an owner/operator may have one or two cars. You do hear the stories of these taxi barons with 40 vehicles etcetera, and I’m sure they exist, but they could qualify for finance at the banks and we are really financing the entrant into this market.
ALEC HOGG: What do they need to get going?
DAVID HURWITZ: The most important thing is a license – not a driver’s license, obviously, you’ll need that – but a route license, and that’s very important to us. The way in which we engage with our client base (the taxi operator), is that we treat them as a small business. Once he has that route or that permit, we will then go into our database and the skill we have – the specialisation – is around the information of the industry. We’ll see which route he’s licensed to run and we’ll then have, in our client base, proxies for that route and we’ll then know if that route is profitable or not. That is probably our biggest competitive advantage or barrier to entry, is the information we have around credit decisions.
ALEC HOGG: Who allocates those routes?
DAVID HURWITZ: Those routes are allocated by the local governments, but are also controlled by the associations because the associations are very careful in making sure that there aren’t too many operators running the same route.
ALEC HOGG: There’s not a whole lot of competition, then. It doesn’t sound as though it’s a free market, at all, which protects you but clearly, people might be paying more than they need to pay.
DAVID HURWITZ: I wouldn’t say that it isn’t a free market, but I think you need to make sure that those routes are viable. If there are too many people running it, taxi operators won’t be able to earn a living.
ALEC HOGG: Yes, but Adam Smith taught us about the invisible hand and it knows a hell of a lot more than any association, about how many people can go into that industry.
DAVID HURWITZ: Yes, you’d have to get that type of…
ALEC HOGG: But it doesn’t matter to you, because as far as you are concerned – good credit risks.
DAVID HURWITZ: Yes, we decide the credit risk based on the future cash flow that operator will generate from his route.
ALEC HOGG: Once he has the route license and he’s now able to drive a taxi between two points, how much money does he need to get going from there?
DAVID HURWITZ: From our perspective… Are you talking about the start-up?
ALEC HOGG: Yes, I want to start a business. I have my route license now from Soweto to Johannesburg or Soweto to Sandton. How do I then go about getting into this business?
DAVID HURWITZ: Start-up capital would involve two things, (1) the license, because you do need to pay for that license and your association fees. That varies from area to area. It could however, be as much as twenty to thirty-thousand Rand and of course, you need to buy a vehicle. We have always supported what we call the premium vehicles, which are Toyotas. I shouldn’t say ‘we’ve always’. Right now, we are supporting the Toyotas and the Nissans. Some of the longer distance vehicles would be the Merc’s and the Iveco’s. Toyota today, and the Nissan too, quite frankly, would retail from somewhere around three-hundred-and-six thousand Rand to about three-hundred-and-forty thousand Rand. All in all, you could need about three-hundred-and-fifty thousand Rand to start a taxi business.
ALEC HOGG: What percentage of that would you loan?
DAVID HURWITZ: We would loan about 80 percent or so, but it’s not as much about the loan-to-value. It’s really about which he’s operating and can he make money out of it. We are funding income-producing assets. You started talking about unsecured lending. If you think about unsecured lending, what that does is it eats into somebody’s disposable income because they’re consuming. We take a completely different view. We will say ‘if we lend him this three-hundred-odd thousand Rand and he has to repay us ten-thousand Rand per month for his instalment, his insurance, and his car tracking fees, how much excess will he have over that’. Our buffer is about a five to ten thousand Rand per month buffer, so he will be earning between fifteen and twenty thousand Rand, and paying us about ten.
ALEC HOGG: That’s a 50 percent margin, which sounds rather good, except that he has to live. I guess he’ll take it easy, as every entrepreneur does in the first period of their business.
DAVID HURWITZ: Say again.
ALEC HOGG: When every entrepreneur starts a business, generally, you don’t take out. You put in.
DAVID HURWITZ: You put in. That’s right.
ALEC HOGG: You don’t really expect to earn a salary from day one. Is it a similar thing?
DAVID HURWITZ: No, they could earn something almost from day one.
ALEC HOGG: The demand for this kind of entry into the business world, has it increased? Has unemployment risen?
DAVID HURWITZ: Effectively, if I’m looking at the taxi industry, there are two-hundred thousand taxi vehicles on the road, and only about seventy thousand are financed. We don’t see the taxi industry growing dramatically. We view it as growing with single figure growth, together with GDP, which is about employment. The real opportunity for us is that as I said, only seventy thousand, of the two-hundred thousand, are financed. The other 150, by implication, are the old vehicles, which need to come off the road. From an end-user finance perspective, there’s quite a big opportunity to take older vehicles off the road, and finance new vehicles on the road.
ALEC HOGG: Fascinating insights into the taxi industry, David, thank you. Just from Transaction Capital generally, this is clearly a niche you have here. You’ve gotten out of Bayport now and the unsecured lending area. Where might you be targeting next?
DAVID HURWITZ: As you know, we have a big services business, which is the biggest external debt collector in the country, where we collect debt as an agent and we also buy debt from the credit providers. What is interesting and is also developmental business – and maybe we can talk about it a bit later – but we would certainly look to invest into the services space, which would be call centre businesses, credit data management businesses, collection businesses, and payment services businesses – we collect about R1bm per hour in that business. There are many services business we could invest into.
ALEC HOGG: But are you going to do it, given that you’ve been offloading a many businesses recently?
DAVID HURWITZ: Absolutely.
ALEC HOGG: Are you two going back into the investment phase now?
DAVID HURWITZ: Yes. Our balance sheet is strong. We’re sitting with a high capital adequacy ratio, and part of that capital is actually represented by pure cash of about R750m sitting in a call account at the moment, which is available purely for acquisitive growth. It’s not needed for organic growth at all.
ALEC HOGG: It’s not going to be given back to shareholders.
DAVID HURWITZ: No, we did. As you know, we returned about R2.10 per share back to shareholders, which was about R1.3bn and we retained the R750m specifically for acquisitions.
ALEC HOGG: So there’s no ‘use it or lose it’ clause, which is what I was getting at. When you did all those sales, there was an anticipation of ‘well, that’s the end of Transaction Capital. They’re now really going out of business. They’ll be returning cash’ and shareholders would then look for something else. You’re telling us a different story.
DAVID HURWITZ: Absolutely a different story. We sold Bayport to reduce risk. We spoke about the unsecured lending market. It has been well documented – the state of the South African credit consumer, and that transaction was really about reducing risk. The sale of our payment services business was something different. That was an offer with a PE ratio of over 20, our mandate is to create value for shareholders, and we thought that was the best way to create value. It was an unsolicited bid, so there were two transactions close together, and that shouldn’t signal a shrinking or delisting of Transaction Capital in any way. After that, our market cap excluding the cash, was about R3bn and we figured that to sit on R2.5bn worth of cash – almost half of our market cap – just wasn’t acceptable, so we returned a portion to shareholders and retained a portion to allow us to do acquisitions.
