The M&A Market in Africa’s Alternative Finance Sector
Originally published in MicroCapital Monitor, February 2017 ,Vol 12: Issue 2
Headlines in the M&A market in Africa recent years seem to have been dominated by the to-ing and fro-ing of Anglo-South African giants such as Barclays Africa / ABSA and Old Mutual. However, the middle market in financial institutions has been perhaps more active. The M&A market in the alternative finance sector (non-bank or “speciality” lenders) has seen at least thirty transactions (excluding minority stakes) completed over the last five years, and activity levels remain robust over the last 18 months notwithstanding the slow-down of the M&A market overall.
The alternative finance sector covers a range of credit institutions which are not part of the traditional banking sector, for example, micro (enterprise) finance, consumer finance, specialists in leasing or invoice discounting, vehicle lending, housing finance, student finance, fintech and specialist banks. Awareness of this sector has recently become much more nuanced: in the past, institutions in the sector might historically just have all been lumped under microfinance umbrella.
We have seen a number of critical drivers of the consolidation in alternative finance in play recently. Firstly, specialist private equity funds targeting the sector are growing in size and number, including a number of which that are now on their second or third funds. Much of the limited partner commitments for these funds have been sourced from development finance institutions, and many are targeting measurable social impact in addition to financial return. As well as bidding for new assets (we had eight private equity funds in due diligence for a recent transaction in the sector), many of these funds are now in “exit mode,” looking to sell their stakes in portfolio companies. In some cases, we have seen private equity shareholders act as catalysts for their portfolio companies to sell non-core subsidiaries or even to sell the portfolio company outright.
Cross-border consolidation by regional leaders is another important factor. Many of the largest players have been active acquirors. For example Letshego, which is listed on the Botswana Stock Exchange with assets of USD 710 million and operations in eleven countries, has bought two businesses in West Africa, the larger of which is afb Ghana, which it bought from JUMO World in a transaction managed by Verdant Capital as advisor to the vendor, JUMO World. Pan-African fintech lender MyBucks recently acquired the subsidiaries of Opportunity Bank, a traditional bricks and mortar micro-enterprise lender, that are present in six African countries.
To date, the leading South Africa consumer lender – and now fully-fledged bank – Capitec has not elected to expand outside South Africa. Although Opportunities represented by individual countries in the rest of the Continent, have much more limited scale, they generally benefit from lower levels of public indebtedness.
Horizontal consolidation is an important factor as well, as specialist lenders look to broaden their product mix. Often the motivation is acquiring deposit-taking licences or capacity, as this is seen as offering cheaper local-currency funding. In 2014, JSE-listed Namibian financial services conglomerate, Trustco Group Holdings acquired FIDES Bank, thereby bringing a deposit-taking licence into the group, as well as adding SME-lending and mortgages to a product mix including student loans, life insurance and short-term insurance. In Zambia in 2012, Pan African Building Society, owned by the Mukwa Fund, merged with the Industrial Credit Company, thereby combining a deposit-taking mortgage lender with a leasing and SME-lending portfolio largely funded by development finance institutions. We see this trend of domestic consolidation continuing and perhaps accelerating, with at least half the bids for the single-country operators we have sold coming from other domestic lenders.
Finally, financial services technology has become a happy hunting ground for deal makers in the region. Providers of development equity in the sector have included tech funds and specialist fintech funds both from within Africa as well as from the West Coast of the US. Traditional private equity funds have participated in fintech investments, however equally often they been scared off by the very high valuations attributed to even relatively early-stage companies in the sector.
A number of fintech players are speciality lenders who use proprietary technology to originate, secure or collect loans made from their own balance sheets. Fintech lenders are arguably the most capital-intensive of fintech businesses, because in addition to the IP development costs, they also have to raise funding to lend through the proprietary channels they are creating. Take the merchant credit advance model for example, a business model which originated in the US whereby the financial institution advances money to forward purchase their point -of-sale collections, effectively advancing a short-term SME loan. Verdant Capital is currently raising funding for Retail Capital, the leading merchant credit advance provider in South Africa. and the business is expected to remain independent; however, we have seen certain smaller players in the sector be partially consolidated into banking groups. . In the medium term, we expect to see further consolidation between bricks-and-mortar lenders (whether banks or non-banks) and fintech lenders.