In today’s post we discuss the ways that Zimbabwean entrepreneurial bankers raised capital for funding their businesses during the growth phase. This allows us to consider various ways of funding our own businesses. Be blessed.
As the entrepreneurial banks grew, they ate into the market share of the established banks. Sales increased and overall business risk was reduced but the strategic thrust changed. Most of the banks had achieved market entry at the lower end, as either advisory services, stockbrokers or as merchant banks. They now desired to increase market share and enter the commercial banking sector as market development opportunities arose. Sales increased based on aggressive marketing campaigns. Strong brands were created. However these competitive strategies all required heavy upfront investments which were justified on the expectation of future long term growth. Massive branch roll-out programmes and product innovations were launched. This implementation of newer forms of competitive strategies, as well as the change in strategic thrust, resulted in inherent financial risk.
New rounds of funding were required and although the financial risk was lower since the business concepts had been proven and accepted by the market, the market development strategies still posed a risk. For example NMB and Trust Bank performed well as merchant banks, but would they be accepted as commercial banks? Did they have the requisite competencies for commercial banking? It follows that due to the risks, equity investors keen on capital growth (since dividend payouts were unlikely due to the need to reinvest for more growth) were preferable to debt funding. However one needed to broaden the investor base.
Most banks in this phase went on road shows in search of long term equity investors through private placement. Trust Bank entered a strategic private placement arrangement with First Mutual Life, resulting in FML becoming a 25% anchor shareholder in the bank as well as providing a significant cash injection.
A private placement is used when the shares of a company are placed in the hands of selected large investors for strategic purposes e.g. a large financial institution. This form of fund raising is quick and relatively cheap. It dilutes shareholding but, if sufficient strategic benefits accrue, it is useful. The Meikles-Kingdom strategic alliance falls into this category. It proved beneficial to both organisations as huge cash investment was ploughed into Kingdom to purchase a 25% equity stake, as well as the opportunity to mobilise huge deposits from TM stores. It thus gained a loyal and powerful customer. Meikles has benefited in return from a viable investment and proceeds from Meikles Financial Services – a joint venture by the two partners.
Other banks used private placements at inception when they were seeking new shareholders. Both Kingdom and Trust used this strategy at the growth phase of their development.
At this stage insurance companies, pension funds and other long term investors who had observed the success of the new banks signed up. This increased credibility for the banks and increased the customer base. Among the banks studied, Kingdom seems to have mastered the art of strategic private placements. The major advantage of private placements is that it enables entrepreneurs to bring in strategic and friendly shareholders to secure their interests.
Private placement increased the shareholder base while releasing funds to entrepreneurial banks. However these new investors did not have an easy exit route for them to sell part of their equity and realise the benefit from capital appreciation. This was critical to these investors, since at this time dividend payout was still either low or non-existent. There was thus need for those entrepreneurial banks which desired further growth to consider listing on the stock exchange.
Kingdom Bank reverse listed on the ZSE on the back of the acquisition of the Discount Company of Zimbabwe. ABC Bank was dually listed on both the ZSE and Botswana Stock Exchange. NMB was dually listed on the ZSE and London Stock Exchange. Other banks, like Trust and Century, also listed on the local exchange. These listings relied on the past successes of the banks.
Initial Public Offerings are expensive, due to legal and accounting costs incurred in an effort to comply with stock exchange rules. Most of these were based on clearly communicated financial strategies which emphasised high growth and low dividend yield expectations to enable high cash retention to fund future growth opportunities. The investors were thus focusing on capital growth and not dividend payout. The rationale was to allow existing shareholders to get cash out of their investments more rapidly than dividend payout by disposing of some of their equity holding. Indeed most of the entrepreneurial bankers recouped their initial investments and reinvested in other industries and so diversified their portfolios.
Another capital raising strategy used by entrepreneurial bankers in this growth phase was the issue of rights to existing shareholders. NMB, ReNaissance and Kingdom employed this strategy. Kingdom seems to be a master at this as it has carried out at least four rights issues since 1999. A rights issue raises capital from existing shareholders, which emphasises their confidence in the business. These are critical in crisis times. When a rights issue is fully subscribed, like the Z$100 billion rights issue by Kingdom in January 2005, market confidence in the venture rises. Those who opt not to exercise their rights can choose to sell that option.
Some times new shareholders are invited so as to restructure the shareholder base, through an opportunity to underwrite a rights issue. An example is when CFX invited POSB to underwrite its issue in 2006 resulting in it becoming a significant shareholder in the bank. In fact it is currently seeking to increase its shareholding close to a majority stake. At times a company can increase its strategic investors’ equity by having them underwrite the issue e.g. Meikles underwrote the Kingdom rights issue in 2005 and increased its stake from 25% to about 33%. However organisations may refuse to have unwanted people increase their share by denying them the right to underwrite the issue e.g. when a private investor in NMB wanted to increase his equity through underwriting, management refused. In a rights issue, the venture sells shares at a discount to existing shareholders to raise funds. Kingdom in 2006 issued a rights issue for $1.5 trillion which was priced at a premium rather than at a discount. It appears as this was meant to discourage others following their rights in order to concentrate the shareholder base in the hands of the few while pushing the share price up in the event of a successful issue. A rights issue can thus be used to control or increase the equity held by friendly shareholders merely through the choice of the underwriter, who in turn can place part of the excess unsubscribed shares in the hands of carefully chosen investors. Normally these avoid dilution of existing shareholding unless the shareholder decides not to follow his rights and opts to sell those rights to someone else. These are easy to administer.
Other methods that growing ventures may use to raise funds are share splits and share consolidations. These were used by entrepreneurial bankers as well, though their fund raising effectiveness is dubious. Indirectly however they may increase or reduce the share price, driving market perception and the market capitalisation of the organisation. KFHL had a share consolidation after the 2005 rights issue.