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How Founder Of 27four Investment Managers Drove Transformation In The Industry

Fatima Vawda of 27four Investment Managers unpacks the opportunities for South African SME growth.

Nadine Todd

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Vital Stats

  • Player: Fatima Vawda
  • Company: 27four Investment Managers
  • Affiliations: On the board of the Association of Savings and Investment South Africa (ASISA), and the reporting working committee of the Financial Sector Charter Council.
  • Est: 2007
  • Visit: www.27four.com 

South Africa has a unique business environment. Broad-Based Black Economic Empowerment (B-BBEE) has created opportunities for small black businesses that many other small and mid-sized businesses around the world don’t have. However, B-BBEE has also added layers of complexity to doing business in South Africa.

Many traditionally white-owned businesses have viewed these changes as stumbling blocks, when in fact, with the right mechanisms and strategic focus, B-BBEE offers opportunities to everyone, black and white alike. The goal is to build and support a rich, diverse economy in which SMEs play a vital role. When the economic foundation of a country is strong and stable, everybody wins.

Transformational growth

Fatima Vawda founded 27four Investment Managers in 2007. 27four is an asset management firm that historically only managed money in the listed market, including the JSE, South Africa’s bond markets and global markets.

Related: Silver-Sphere Trading Gives Top Advice About Investing In (The Right) Precious Metal

However, Fatima’s goal when launching the firm was to spearhead change, not only in the asset management space, but the South African economy as a whole. She wanted to be on the ground floor, impacting the transformation of her industry as well as her country.

Fatima’s first focus was on her industry. After 12 years in the asset management industry, Fatima started 27four with no money and no client base — but she knew she’d be a first mover in the market in terms of transformation. Today, 27four employs 60 staff members, including some highly skilled entrepreneurs, and has incubated 32 black asset managers who have since created 600 jobs. Just over a decade ago, black-owned asset management firms didn’t exist. Today they manage R415,5 billion rand of a R4,9 trillion investment and savings industry.

“We still have a long way to go, but we’ve already seen incredible change. The main value proposition I brought to market 11 years ago was that the asset management industry was largely untransformed. The entire industry flowed through white asset management firms. You could count on your fingers the number of black asset management professionals that were actually managing money within those firms, and no independent black asset management firms existed. Through 27four we established a black asset management incubator programme that looks for asset managers who have experience in the market, but who are also entrepreneurial and can run their own firms.”

Through the incubator, 27four places start-up managers, who then become emerging managers, mature managers, and finally graduate and exit the incubator when Fatima’s team feels they can compete with the industry’s incumbents. Once they exit the incubator, they become a part of 27four’s mainstream portfolios. For example, the first company 27four incubated was Mazi Capital, giving them their first R150 million to invest.

“Today, they are a R45 billion asset firm, have won multiple awards and employ more than 50 people. We afford them the same respect as we give to an Old Mutual or Coronation,” says Fatima.

“Many institutional pension fund investors don’t want to have all their eggs in one basket — this gives them diversified exposure. We essentially create a diversified pool for them.”

The incubation programme is helping Fatima realise her vision of a transformed asset management industry, but the next step was helping the economy as a whole grow and prosper, while still supporting B-BBEE codes.

The investment perspective

According to Fatima, there are strict criteria governing the funding of black business growth in South Africa. “It should go towards black-owned and controlled businesses, from start-up enterprises all the way to mid-market companies, to support the growth and development of these enterprises,” she explains.

“Ultimately however, if we look at funding for black business growth, it all comes down to the fact that we need to support enterprises to create more jobs to fuel the economy. If we’re able to create a cycle of positivity, job creation will naturally follow and business confidence will increase. When business confidence increases, economic growth improves, the commercial and industrial sectors pay more taxes to the fiscus, and there’s more money in the kitty to pay for healthcare, education and service delivery. It’s win-win for everyone.”

With this view in mind, 27four has launched a Black Business Growth Fund that offers real opportunities for mid-sized businesses to grow, regardless of the current B-BBEE ownership status of the business pre-funding.

27four’s Black Business Growth Fund has a clear focus on industrialisation and job creation. “The fund’s focus is on mid-market companies looking for capital outside of the formal banking sector. This is typically a private equity-type capital that allows them to expand and to grow. Through our fund, we can support these businesses, while also introducing a BEE shareholding into them.

“Because BEE legislation says that if you are a black private equity enterprise, you can transfer your BEE ownership to the underlying enterprise, as ‎27four we are able to provide debt and equity solutions to the businesses we invest in, while transferring our BEE ownership to them.

“For example, if we find a fantastic white business that’s innovative but struggling to gain access to market because they don’t have the necessary BEE points, we can assist them. In our experience, most of these businesses want to transform, but find it very difficult to do that as a white owner. We’ve also found that there are thousands of really, really good family-owned businesses that have been successfully operating for many years, but are now suddenly kicked out of the cycle because they don’t have the necessary empowerment credentials. They want those credentials, they’re wanting to transform and create jobs, they’re committed to the South African economy, but the avenues do not exist to allow them to be able to transform.

“When our managers invest in these businesses they prefer to take black equity ownership in them. This gives them the BEE credentials they need and also ensures that we’re committed to their success because we have skin in the game.

Related: Now Almost Anyone Can Invest In A Hedge Fund

“Once our managers have invested in a business they have regular meetings and engagements to ensure all management accounts are up to date, establish what the deal pipeline looks like, and so on. These businesses have first-hand access to a very skilled team and their expertise to ensure the business is strategically heading in the right direction.”

This is a mid-market fund, which means 27four is typically looking for businesses in the R100 million plus turnover range that are looking for growth opportunities. “The type of investors in the Black Business Growth Fund are pension funds. These are investors who want to earn an investment return, but also ensure their return is generated from doing good, contributing towards job creation, industrialisation, environmental and social changes. In addition, many institutional investors have so much money on the JSE, this value proposition provides them with an opportunity for investment returns uncorrelated to the listed market. They’re basically taking some of their allocated funds and putting them towards investments that are uncorrelated with global markets. If there’s a stock market crash, these returns will not be affected by it in the same way as listed returns will be.”

The lesson: Investment teams are always looking for deal pipeline. Throughout the private equity industry, deal makers and transactional people are looking for opportunities, and many of these come from word-of-mouth referrals. “We’re always talking to experts within the field, from SAVCA (the South African Venture Capital Association) to communities associated with SAVCA, business organisations and other experts in our network.” The lesson is simple. If you’re looking for investment, or you know that in the near future you will be, it’s important to start building a network that knows you, your business and what your growth goals are.

“Find people in those spaces to network with. Talk to them and find a fund that suits you. Often, it’s the fund that finds you because you’re having the right conversations with the right people.”

The second key point to consider when it comes to investments is what the investor’s due diligence will entail. “Due diligence is about identifying if this is a sound investment opportunity,” explains Fatima. “At this level we are looking for investment growth, because we need to deliver a return to the investors coming into the fund, and we’re looking for stable, good management in those businesses that will result in growth. This includes good free cash flow, sustainability in terms of their underlying client base and long-term contracts as well as looking at any motes that they may have: What are the barriers to entry in their market, what is their differentiator and so on.”

If you’re looking for investment, or you know that in the near future you will be, it’s important to start building a network that knows you, your business and what your growth goals are.

Nadine Todd is the Managing Editor of Entrepreneur Magazine, the How-To guide for growing businesses. Find her on Google+.

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What’s Your Number? How To Unpack Company Valuations

Business is booming. Investors want in. But how do you put a price on the value of the company you have built with your own hands?

Louw Barnardt

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Company valuations is such a hazy part of the scale-up journey of a private company. Putting a price tag on a business is both art and science. At the end of the day, the number that makes the headlines (if ever disclosed) will be where willing buyer and willing seller meet.

But how do you , as business owner,  go about setting your asking price? Before approaching investors, it’s a good exercise to determine your own valuation range for the business. Choosing the right valuation method is the first big question. The answer has many parts to it, but the most important driver is the stage of the business.

Let’s look at some of the most commonly accepted valuation methods in our market:

Earnings Multiple

Applicable stage: Established, profitable companies

Listed companies, institutional players and private equity investors normally invest in a company for its cash flow profit that can contribute to their portfolio income. More often than not, companies will be valued based on their current earnings (bottom line profit after tax).

This method can only be used for companies that consistently make a profit. A multiplier will be chosen based on the company’s perceived risk. Younger, more risky businesses will likely have lower multipliers (as low as 3 and 4) and high growth, well established, lower risk companies will get higher multipliers (8-15).

Sometimes small adjustments are made to current year earnings (like non-standard, non-repeating income statement items) after which the valuation is set at Earnings times multiplier equals company valuation.

Related: 7 Factors That Influence Start-up Valuations

Discounted Cash Flow (DCF)

Applicable stage: Post-revenue start-ups, growth companies and established businesses

The most commonly used method in practice, the DCF method argues that a company’s value is determined by the future cash flows that it will yield to investors.

The starting point is creating a five to ten year cash flow forecast for the business. This is no small feat. In order to create a full financial model – income statement, balance sheet and cash flow statement – for the next decade requires a lot of work, both from a strategic and technical perspective.

Investors love this model because if forces the owners to put a clear strategy and expansion plan for their business into numbers. It will include dozens if not hundreds of assumptions – all of which can be scrutinised for reasonability. The result of financial model will be five to ten years’ worth of projected cash flows. These amounts are then discounted to present value at a discount rate that reflects the company’s risk and expected cost of capital.

The sum of the discounted future cash flows plus a terminal value (that represents the value after the five or ten year period of the model) then represents the valuation of the company after some final small adjustments for things like existing debt in the business.

Revenue Multiples

A revenue multiple valuation approach is focused on the market for similar businesses and is underpinned by your company’s current turnover. It seeks out the sales price of other similar companies in the country or worldwide, adjusted for size, stage and market differences.

A company that sold for R100 million at a turnover of R50 million would have a two times revenue multiple (valuation/revenue). If the average revenue multiple for similar companies is in a certain range, this multiple is then slightly adjusted and applied to your business.

If the average sale in your industry has been two times revenue but you are growing much faster than the average with a better competitive advantage, you can argue that two and a half times revenue is a more applicable number for your business. Revenue multiples are often used as a reasonability check in the market for the current asking price.

Related: Why Start-ups Like Uber Stumble When They Scale

Other methods

Most established companies are valued using one or a combination of more than one of the above three methods. At start-up stage, there are a number of other methods like Cost to Replicate or the Scorecard Method that early stage investors look to. When a company is simply in too early stage to practically value it, seed stage investors would also consider SAFE Agreements (Simple Agreement for Future Equity) – an instrument that determines that the percentage of the company the investors are buying with their investment. This is only determined when the Series A round is raised at a future date and under certain conditions, generally at a discount to the price the series A investors are paying.

Company valuations are complex. Many of the above technical factors play a role. A lot of it also comes down to the salesmanship of the owners and the negotiating capabilities of the parties. In ‘How Yoco Successfully Secured Capital And The Importance Of A Pitch’, the Yoco team speak about the importance of the right approach in their recent R248 million fundraising

Don’t go into this process without seeking some kind of expert advice. The price of the wrong valuation is simply too high. Make your numbers and your arguments bulletproof and you will be on your way to defending a strong and exciting valuation for your next raise!

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3 Keys To A Vision Others Can Own

Trying to get others to buy into a vision that is all about you getting more money is not going to excite people.

Zech Newman

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I get really excited about my dreams. Over the years, as I have led my team, I have realised that they aren’t as excited about my dreams as I am. I own two restaurants and employ minimum wage employees. In the early years of owning my restaurants, turnover killed me. I used to fight for them to have the same passion for my goals and dreams as I had and as a result I had extremely high turnover. Confused and frustrated, I knew I needed to change the way I was leading a team.

A few little changes have created a committed team and extremely low turnover. If you don’t have a passionate, committed long-term team, check these simple vision casting strategies.

Deeper Vision

Often our vision that we cast is shallow and self-serving. A vision that is all about you getting more money is not going to excite people. Take some time to uncover what you are trying to accomplish. When you can cast a vision beyond your selfish desires, others can sink their teeth into the vision. For my company, I wanted to raise up leaders to change the community.

My focus changed to my crew and they could feel the shift in perspective, which also helped me to earn a bi-product of more money, my original desire.

Related: 30 Top Influential SA Business Leaders

Their Vision

Our deeper vision helps us keep and build a team, but it’s still our vision. We need to really understand the goals and dreams of our team to find untapped potential and loyalty. No one will ever care as much about our vision as us because it’s ours. The more focused you get about helping your team and their wants and desires, the more they will care about yours. In my restaurant I had a young lady who wanted to be a teacher. I thought about what it takes to be a great teacher and how I could help her toward that. Find out what they care about and dig deeper to see what is behind that desire.

Marry the Two

If you have a team running around caring only about their vision they may be loyal and passionate, however, they will not be united in one direction. Magic happens when we combine our vision and their vision. At the points of intersection, our interests and theirs are united to accomplish more. I want to encourage leaders who can change the community.

Related: Business Leadership – Learn How To Embrace Change

As for the employee I mentioned above who desired to be a teacher, I trained her toward being a better teacher so that she could raise up young leaders to change the community. Now she is one of my top supervisors and teaches many other crew members. She will be an awesome teacher someday, but in the meantime, she is a valuable team member.

Caring for a team and helping them see how your vision and their vision can help each other will change everything. Growing people is the business no matter what business we are in. Care for others and they will care for you. Care only for your own wants and you will never get the most out of your team. Find a deeper vision, figure out your teams’ vision, and combine the two and your business will transform.

This article was originally posted here on Entrepreneur.com.

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3 Signs You Are Your Own Worst Business Enemy

It’s hard to be objective about ourselves but if we really pay attention our colleagues will reflect how we are perceived and what it means for the business.

John Boitnott

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Sometimes, it’s hard to get out of your own way.

Entrepreneurs and business owners have to keep all the trains running on time, as well as figure out the next place they’d like those trains to go, metaphorically speaking. It’s a huge, complex job. So it shouldn’t be a surprise to realise that in many cases, the problem behind an underperforming company is the boss.

How do you know when it really is “just you,” though? We human beings have a notoriously difficult time being objective about our own behaviour and choices.

So, try looking for the following signs in the people and circumstances around you.

1. Your employees seem unusually tense or flat lately

Has the camaraderie vanished? Is the workplace one big collection of really bad moods, most of the time?

Of course, the boss’s mood can infect the entire office. As the leader of your team, you set the example and the atmosphere, and your employees follow your lead.

Getting along with others, both inside and outside your company, is imperative for success. If your employees and customers sense a negative change, then it’s worth examining your behaviour. These signs could be symptoms that you’re becoming a toxic boss.

To address this, first make sure you’re acting with integrity and in accordance with your personal values. Next, make an effort to demonstrate empathy with your employees. You don’t have to agree with every single point they make to do this. Respect their boundaries and try to see the issue from their perspective.

Finally, make sure you listen deeply. Employers who simply command and demand compliance find themselves stuck with the “toxic” label all too quickly. Instead, be curious about your employees’ perspectives and problems. Ask open-ended questions to get them to tell you more, and listen to what they say.

2. You feel deeply frustrated with your employees

employee

Are you feeling unusually impatient around new workers? Do you find yourself snapping at experienced workers over small annoyances or accidents?

If so, there could be some deeper issues at play.

Insisting on perfection, or even just on competence in an unreasonable amount of time can eventually sour your entire workforce and drive away valuable employees. You’ll have a hard time attracting and retaining talent if you create an awkward, uncomfortable or outright hostile environment.

Instead, try practicing a “talk-down” method on yourself. When you feel your impatience or annoyance growing, mentally talk yourself down from these emotions to a state of greater calm. Here are some questions to ask yourself:

  • On a scale of one to 100, how bad is this, really?
  • What’s the worst that can happen here, realistically speaking?
  • If that happened, how would we respond?
  • Is this more important than my relationship with my employees? Or my reputation?

In most cases, reflecting on these questions helps you keep small issues in check. You’ll also want to give some thought, however, to whether there’s a bigger issue just beneath the surface. Using smaller problems as a diversion from the bigger ones provides an effective distraction from tackling life’s larger challenges, but doesn’t do much to help us solve underlying issues.

3. Minor projects are infinitely refined and “perfected” but your company hasn’t come up with a strong new idea in ages

One of the most common ways entrepreneurs become their own worst enemies is by focusing too heavily on things that don’t deserve so much attention. For whatever reason – be it fear of failure, fear of success, or something else altogether – people fall into the habit of spending too much time perfecting existing projects when they should be thinking about what’s next.

Not giving yourself enough time to create and innovate is one of the biggest ways to become your own worst business enemy. Your primary job as the business owner is to create that overarching vision for your company, and then work with your team to figure out how to achieve that vision. If you’re not even allowing yourself the time to do so, you’re fighting an uphill battle without reinforcements. After all, no one else can really do this kind of work for you.

To combat this tendency, try keeping a log of your time for two weeks. Track your time in fifteen minute increments to help figure out where you’re spending the majority of your attention and energy. Then carve out uninterrupted “CEO time,” and schedule it as if it’s a firm appointment you cannot reschedule or miss. Give yourself at least three hours a week to work on new ideas for your company.

Takeaways

It’s hard to be objective about our own behaviour and surroundings. Instead, use your colleagues, employees, and environment as a mirror to reflect back to you the reality of how you are perceived and the ways that perception is impacting your business. Then take the appropriate action to mitigate those challenges.

This article was originally posted here on Entrepreneur.com.

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