Secha Capital
Investing in African companies
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What we do

The right way to invest in African impact

We provide patient capital to established African SMEs in the "missing middle"; address the management gap by joining the management team; reach full potential via our accelerator toolkit

 
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Creating jobs

The high unemployment rate in South Africa is solvable and SMEs are a key component to achieving this. Today, SMEs make up 91% of formal businesses, employ 60% of the labour force and contribute ~45% to GDP[1]. These are encouraging stats, however when unpacked, we see that 2/3rds of these SMEs do not employ anyone outside the founding team.

The Secha approach is to help established businesses scale efficiently and as a result employ many more people in sectors that are traditionally large contributors to the labour force i.e. FMCG and Agri-Business. We bring the operational expertise to grow businesses beyond a small operation, towards medium and large enterprises

[1] Bureau for Economic Research: The Small, Medium and Micro Enterprise Sector of South Africa,2016


Addressing the management gap

The top 3 challenges faced by SMEs in South Africa are: 1) Skills deficit; 2) Funding; 3) Limited access to markets[2]. SME founders more often than not, do not have a tertiary education, or cannot afford a university graduate to help them formalise their businesses. In South Africa, university graduates are very quickly snapped up by large corporates, with the result being that SMEs are unable to tap into the talent pool needed to grow their businesses

The Secha approach solves these three challenges neatly while still providing attractive returns for investors by using sweat equity as a multiplier on the capital return:

  • We provide capital for these businesses to scale, but also ensure we transfer our skills and experience to the management team who will work towards a well-defined long term strategy
  • Our skills and experience are built from top tier global universities and the experience working with multi-national corporations both locally and internationally
  • We share these skills with SMEs through our 9-month accelerator toolkit
[2] SiMODiSA: Accelerating the Growth of SMEs in South Africa, top 25 constraints inhibiting the development of effectively functioning entrepreneurial ecosystems in South Africa

Focusing on the missing middle

Funding for businesses is most concentrated at the start-up phase (traditionally tech/ finance industries), or at the late stage strategic acquisitions. Between those two phases there are many businesses who are left to fend for themselves. The issue with start-up funding is that it is extremely risky: 7 out of 10 businesses fail within their first three years[3]. Late stage strategic acquisitions are extremely rare, and while it could be an aspiration for most established businesses, it is highly unlikely that more than a handful of the two million plus SMEs will ever reach that stage.

The Secha approach is to focus on the missing middle, companies who have passed the proof of concept phase, who have a tangible product or service that has seen market acceptance and help them scale.

  • For investors, the risk is drastically reduced while returns are amplified by the sweat equity earned by taking operational roles
  • We help these businesses reach full potential and then recycle capital to help the portfolio of OpCos to grow
[3] SMESouthAfrica.com: The Big reason why SMEs with business support do better than those without, 2015

Building businesses with a purpose

Impact investing is a relatively new approach to investing. Most investors believe there needs to be a trade-off between financial and social returns. In an economy with tangible social and environmental challenges, capital is often allocated discretely for financial or social return, with limited overlap.

At Secha, we believe in doing well by doing good [4]. There does not have to be a trade-off between social and financial return.

  • We target investments with sustainable business models and an intrinsic focus on a product or service that delivers social impact. When the businesses succeed they can deliver financial and social returns at scale
[4] Impact Alpha defined by The Case Foundation: A growing number of investors are making the case that “impact” may represent a fundamental insight that the rest of the market doesn’t yet fully value, raising the possibility of market beating returns. These investors reject the trade-off between social impact and financial return— rather than seeing returns or impact they see returns from impact.
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Investing for the long-term

Traditional private equity or venture capital funds have 5-7 year investment mandates. There is merit in having these defined investment mandates for investors, however this is not always to the benefit of the underlying investment (i.e. the operating company). The operating company will have to constantly deal with new ownership structures, different strategic directions and may eventually result in ‘redundancies’ as new owners look to maximise returns at the cost of jobs

Secha is structured as a holding company. This allows us to unlock value over the longer term, while utilising the portfolio of operating companies to extract synergies.

  • We are a patient capital impact investing holding company and have a number of levers to pull in order to provide returns and liquidity for our investors. We do not collect the traditional 2 and 20 fee, but instead look to align interests of the Secha management team and operating company by earning sweat equity which in turn multiplies our investor returns 

Secha takes the best parts of traditional investment models and implements them on the ground for African businesses.

INVESTORS WILL GAIN EXPOSURE TO:

  • An experienced management team who understand the challenges of implementing growth strategies in African businesses and are willing to put in the hard hours to ensure success
    • You are investing in a management consulting company but with clearer aligned interests in ‘clients’ through equity stakes instead of management fees
  • A portfolio of businesses with a proven track record and clear adjacencies to maximise shareholder value
    • You are investing in a ‘search fund’ but with limited risk through diversified holdings of multiple businesses
  • SMEs in South Africa who contribute 60% of total employment and have high growth potential. These are businesses that are too established for start-up funding, but too small for strategic acquisition
    •  You are investing in a ‘PE fund’ that focuses on smaller businesses with longer term horizons, and partners who do not take the traditional ‘2 and 20’ fee but multiply your capital through their sweat equity
  • Businesses that make a real difference to their employees, customers and communities through skills development, job creation and sustainable practices
    • You are investing in an ‘impact fund’ that marries return objectives with social impact priorities