Smaller player set to achieve big things
• Financial services firm realises growth by refining model and refocusing approach, writes Penny Haw
With the active support of its shareholders, Pretoria-based JSE-listed financial services company Ecsponent Ltd has progressively refined its business model in recent years, says CEO Terence Gregory.
And, given that the company’s balance sheet has grown from just over R8m in 2010 to well over R1bn, the process has certainly borne fruit. The group has expanded from two subsidiaries to more than 20 over the same period. This has included a significant increase in its footprint across SA, Botswana, Swaziland and Zambia. The business model, says Gregory, is providing triple-digit returns year on year.
Among the key moves made by Gregory and his team was to exit the unsecured retail credit market in 2015 before market conditions changed and those who had invested in the sector experienced losses. Instead, Ecsponent turned its attention to the small and medium enterprise (SME) market via its business credit unit, which offers secured medium-term loans. (The company conducts its operations via three business units — business credit, investment services and equity holdings.)
“We have a limited number of clients (in the SME credit market) with whom we have long-term relationships,” says Gregory. “This approach helps us reduce risk because we know each of our clients well and are aware of developments in their businesses. In addition, Ecsponent never takes an unsecured position.”
The focus on the business market, he says, not only resulted in improved margins for the company, but also helped realise additional benefits, including reduced costs for infrastructure. What’s more, the move drew attention to another potential market at the junction of SMEs and larger companies — that is, enterprise development finance.
Ecsponent’s business credit unit developed a holistic service for larger organisations that want to support and advance emerging suppliers as part of their enterprise and supplier development programmes. This has become even more relevant recently as a result of the new broad-based black empowerment equity codes and new sector charters.
Ecsponent’s enterprise development services support and guide emerging companies so that they can become compliant and effective suppliers. This means larger corporations are more easily able to integrate emerging vendors into their mainstream supply chains as fully-fledged suppliers without losing focus of their core business.
“Emerging vendors often lack the track records needed to secure finance to compete for purchase orders or tenders, and skills are regularly a stumbling block,” says Gregory. “We provide companies’ preferred suppliers with funding through the Ecsponent Development Fund, and mentoring and on-the-job training via Ecsponent Procurement Services. This not only gives them a start-up advantage, but helps emerging companies understand and implement best practices on procurement. Moreover, it expedites the establishment of sustainably successful suppliers and businesses.”
As part of the reporting process and in its quest to ensure on-time and on-spec delivery of the companies’ goods as specified by their issued purchase orders, Ecsponent provides its corporate clients with proof of their supply chain development successes via a regularly updated scorecard that tracks vendor performance and each company’s progress in terms of supplier development.
“Ecsponent’s investment services unit is determined to entrench its status as the premier provider of financial services in the niche markets in which it operates,” says Gregory. As such, an established broker network that provides a range of investment products underpins its activities. This distribution channel also raises capital from the public through the company’s JSE-approved listed preference share programme.
As a small capitalisation company (or “small cap”), Ecsponent is among those organisations listed on the stock exchange that have a market capitalisation of less than R2.5bn. Many of these smaller players, says Gregory, are among the best achievers on the JSE year after year.
“With less bureaucracy, smaller companies are more flexible and quicker to market with new products than large corporations. This means that their sales and earnings have the capacity to grow by at least double digits, while larger companies experience more subdued growth. The higher earnings of smaller companies over the long term can also be attributed to the fact that they set aside a large portion of their earnings for expansion. With this in mind, expert investors can make money through direct equity investments if they buy low-cost shares in small caps, which are set to become more profitable in the future.”
Ecsponent’s equity holdings unit is based on the philosophy of investing in technology, intellectual property and other companies with high barriers to entry, which are scalable and provide significant returns.
“Our investments vary from financial technology to biotechnology and media intelligence, and are growing steadily,” says Gregory. “We invest in companies with sustainable growth models and the potential to generate attractive returns. The support of our shareholders and efforts of a skilled and focused management team help unlock the value of these investments for stakeholders.”
THIS MEANS SMALLER COMPANIES’ SALES AND EARNINGS HAVE THE CAPACITY TO GROW BY AT LEAST DOUBLE DIGITS