Deal interview: Crossfin is on the prowl for East Africa fintech acquisition opportunities
The company's acquisition trail continues, as it looks for opportunities in Kenya, Tanzania, and Ghana.
African fintech holding company Crossfin Technology has been on a robust acquisition trail since 2018. It has acquired some big players in South Africa’s nascent but growing fintech industry.
Fintech or financial technology refers to technology and innovation that aims to compete with traditional financial methods in the delivery of financial services. In doing so, technology-driven solutions are used to develop simple and cheaper financial services products – such as insurance, lending and savings products – to drive financial inclusion.
Since 2018, Crossfin snapped up a majority stake in payments enablement firm Crossgate; concluded an investment in Retail Capital, a South African provider of alternative business funding to SMEs; and recently, a stake in insurtech start-up Nobuntu. This week, Crossfin was involved in another deal, that will accelerate its goal of rolling out financial services and products to more financially excluded South Africans.
Crossfin announced its latest business venture with Andisa Partners, a Black Economic Empowerment (BEE) consortium led by former BCX CEO Isaac Mophatlane and KwaZulu-Natal industrialist Gcina Zondi.
According to Crossfin, the deal includes a cash subscription for 20 percent of Crossfin equity via a fresh issue of ordinary shares. In addition, a capital injection will be applied to support Crossfin’s organic and acquisitive growth strategy. In an interview with M&A Africa, Crossfin CEO Dean Sparrow (pictured) said the company has a healthy pipeline of acquisitions over the next few months. Crossfin also has ambitions to explore fintech opportunities in East African countries including Kenya, Tanzania, and Ghana.
M&A Africa: Crossfin has concluded several acquisitions in a short space of time. What is behind the spate of acquisitions concluded?
Dean Sparrow: It is coincidental. It is a consequence of acquisition negotiations that were had over the past couple of years but have now concluded – particularly over the past two years when Crossfin was formally incorporated. It just so happens that the different efforts we have been driving are starting to conclude, and as a consequence, we are making these back-to-back deal announcements.
M&A Africa: Fintech in South Africa is still a nascent industry. What is Crossfin’s focus and strategy in the industry?
Dean: What we are essentially trying to do is drive financial inclusion and independence for the broader wellbeing of African consumers.
The reality around what Crossfin is positioned to do and the portfolio that we are either growing organically or through acquisitions is to deliver a product or service in a market that has been historically underserved. People often challenge us on how we are seeing the kind of growth activity when GDP growth in South Africa is so subdued [economic growth is expected to be less than 1 percent in 2019]. It is because we are finding pockets of demand from consumers and opportunities that were never in the market before.
M&A Africa: Crossfin has announced a partnership with Andisa Partners. Why is Andisa the right fit for Crossfin?
Dean: They are a like-minded team that understands the technology opportunity regarding fintech. We are not trying to educate them as prospective investors around the technology element. What we are showing them is how technology can be utilised efficiently to drive financial inclusion, which they are excited about. Having worked together in different environments over a period of time, we have built trust in our relationship with Andisa Partners. Andisa Partners is well positioned to be our preferred BEE partner.
M&A Africa: Are fintech opportunities a hard sell with investors or is there a general understanding of what Crossfin is trying to achieve?
Dean: I think there is a general understanding of what we are trying to do. When people think about fintech they think we invest in start-up and pre-revenue, pre-profit type of businesses. But we were clear at Crossfin’s inception that we incubated a couple of businesses of that nature and moved to a point where the entities we invest in generate profits. We have a mandate that stipulates that at least 90 percent of our capital allocation at Crossfin should be towards mature and profitable businesses.
M&A Africa: Is there scope for more fintech-type acquisitions?
Dean: That is correct. We have a robust pipeline of opportunities. We have a basic strategic intent; we want to ensure that we continue to build up more touch points with the end consumer to engage with. That is one dimension of our acquisition and organic growth strategy. As we create these touch points, we will continue to look at relevant products and services that we can sell to the end consumers. For example, we recently invested in Retail Capital, which provides SMEs with funding, we are looking to offer credit/lending products to SMEs. And we invested in Nobuntu, an insurance-focused business, and we can introduce savings-type products to the market.
M&A Africa: Which fintech segment is Crossfin underrepresented in and would likely grow its exposure through acquisitions?
Dean: We feel that there is a scope to invest in e-commerce. We don’t have a very strong e-commerce focus. We do see it as an important factor with the end consumer. Another element would be on the products and services – an opportunity around savings products. Whether we buy an existing entity or build an entity from scratch, we are not sure about that at the moment.
M&A Africa: How are you finding the pricing of assets in the market?
Dean: In our specific niche area, the reality is that we are not finding very cheaply priced assets. We are looking at opportunities where we can find pricing at the right level. As a South African based organisation and investor, if we see that there is a healthy cash generation in Ebitda (earnings before interest, tax, depreciation, and amortisation) performance of a business, that is normally where we look to price our transactions.
M&A Africa: Is Crossfin only looking for acquisition opportunities in South Africa?
Dean: The Crossfin strategy is to position ourselves as the largest independent fintech group on the African continent. Where we do see our acquisition activity evolving over the next 12 to 24 months, is definitely outside of South Africa more than in the country. We have been able to grow into a number of African countries, which has largely been driven by customer demand.
We have set-up a business structure in Mauritius. We only have one specific asset in our portfolio that sits under our Mauritius structure which is the wiGroup [Crossfin’s mobile loyalty software company]. We will look to execute future transactions more out of the Mauritian structure to give us better coverage of the African continent, particularly sub-Saharan Africa.
M&A Africa: What other markets are on Crossfin’s radar?
Dean: We are looking at east Africa markets such as Kenya, Tanzania, and Ghana. Those are all logical markets to find opportunities from a fintech perspective. We are also looking at markets adjacent to South Africa's borders that we already operating in [through investee companies] such as Namibia and Botswana. We have attempted to conclude opportunities in Nigeria. But the reality is that we have never received any form of real traction there. But we don’t discount Nigeria.