Risk Finance for SMEs

1. Risk Finance for SMEs Nazeem Martin @ Foromic (Guadalajara, Mexico) October 1, 2013

2. The story • Business Partners • Background • Track record as an SME risk financier • Realities of SME risk finance • Solving the SME risk finance conundrum • Business Partners’ disbursements by instrument/product: Living with and developing an appetite for SME risk finance

3. A word of warning • SME (risk) finance is not an exact science. • There is a broad range of solutions designed to meet the risk finance needs of SMEs. Some have more desirable outcomes (and impacts) than others. • Business Partners provides a very limited, simple, easy to understand and implement set of risk finance solutions for SMEs • Business Partners’ solutions are not perfect. There is much room for improvement. • This is Business Partners’ story (partially, at least) • Of course it’s not the only story. There may be better, more powerful stories.

4. Business Partners: A risk financier • Founded by Anton Rupert and his son, Johann Rupert, successful international entrepreneurs, industrialists & philanthropists. • “Blue chip” shareholder profile • Sustainable risk financier of SMEs in South Africa for > 32 years • S. African & international office network – localized area offices • Expansion into Africa: Country SME Funds in Madagascar, Kenya & Rwanda. Southern Africa Regional Fund (Malawi, Namibia & Zambia). Soon, an “Evergreen” Fund for East Africa. • ISO 9001: 2000 accredited • Deals done: About 350 in a bad year; over 700 in a good year. • A current asset base of more than $330 million ($1=R9.70)

5. The Business Partners thesis To have a development impact (unleash entrepreneurs who pursue wealth for themselves, grow the economy, pay their taxes and create jobs for many) … in the SME sector (bolstering the “middle class”, the fulcrum of successful democracies and free markets) AND To make profits (thus ensuring a sustainable and growing development impact)

6. Business Partners’ finance parameters • Investment range:$52 000 – $3,1 million ($1=R9.70) • Sectors: Manufacturing, retailing, services, franchises, contracts, property, tourism, marine, etc. • Type of Investment: Take-overs, MBOs, expansions (working capital, equipment), Start-ups, Real Estate • Exclusions: Non-profit organizations, primary agriculture & on-lending

7. Business Partners’ track record • Approved more than 70 000 SME financing transactions to a value in excess of $1,35 billion since 1981. • Facilitated in excess of 556 000 jobs since 1981. • Grew $18,4 million initial shareholders’ capital in 1981 … to > $250 million shareholders equity in 2013. • An average ROE of 7,3% from 1996 to 2013. • Current portfolio comprises more than 1 700 SME clients and more than 2 000 SME tenants

8. Investments disbursed(in $million: $1=R9.70)

9. Profits (in $million: $1=R9.70)We have made profits in each of the 32 years we’ve been around.

10. Return on Equity (%)We have, on average, provided our shareholders with a real ROE.

11. SMEs: Panacea for socio-economic ills? It’s very seldom – on any given day – that one opens a newspaper without reading something about SMEs. It is highly fashionable and topical for academics, politicians, financiers, seasoned business people, etc. to talk about SMEs … often waxing lyrical about their potential to generate economic growth and solve the unemployment problem. But, nobody’s really keen to “touch” SMEs because … • There are much easier things to do in life than to “touch” SMEs • There are much easier ways to make money or earn a living than to “dabble” in SME finance/assistance

12. One could make much more money from large (rather than small) deals! • E.g. a $1m deal vs a $100m deal • Cost to source a lead, conduct due diligence, decide to invest and manage a small deal is at least as high as for a large deal. • Let’s say, both small and large deal yields the same IRR, say 25% over 5 years • How much (absolute $-terms) does one make in the small deal? • How much (absolute $-terms) does one make in the small deal?

13. Yields to SME financiers may not be exciting! • Most SMEs can’t pay more than the prime interest rate plus 10% (as an IRR to an investor) for their funding. • The returns on an SME risk finance portfolio may be unexciting: • IRR - 18.5% (P = 8.5% in S Africa) • Less: Costs - 5.0% Bad debts - 3.5% Tax - 28.0% tax rate • Yield to investor - 7.2%

14. Solving the SME finance conundrum • Typically An entrepreneur, with good technical & business skills and viable (possibly high growth potential) business opportunity – approaches a financier for finance (say, $1m) but with little owner’s equity (say $100k) and no collateral. • How do we solve this conundrum? • Bank loans … (?) • Asset-based finance … (?) • Equity … (?) • Risk finance … (possibly)

15. Disbursements per Finance and Product Type(R million: R9.70 = $1)

16. LegendDisbursements by Finance and Product Type • TF - Term Finance • TFR – Term Finance with a Royalty • TFS – Term Finance with a Shareholding • TFRS – Term Finance with a Royalty & Shareholding • PFR - Property Finance with a Royalty • PFS - Property Finance with a Shareholding • PFEP – Property Finance with Equity Participation • EI - Equity Investments • WOP – Wholly-owned properties

17. Recipe: Sustainable SME risk finance, on scale • Patient shareholders seeking to do good, sustainably, via a permanent vehicle (“evergreen fund”) • Burning desire to prove that one could do “development” AND make profits. • A single-minded, relentless focus on SMEs. • Appropriate/flexible, workable & tailored SME risk finance solutions (products). • We know that SME finance requires “more than just money”. • Processes, systems, infrastructure, etc. which enables us to make risk finance solutions available to SMEs on scale. • Attract, train, reward and retain people • with a passion for entrepreneurs, entrepreneurship and entrepreneurial development • who live and behave like investors (not like lenders)

18. Thank you www.businesspartners.co.za nmartin@businesspartners.co.za