When Capital Appreciation listed as a special purpose acquisition company (SPAC) almost exactly two years ago, it was the first such vehicle to list on the main board of the JSE. It raised R1 billion through a private placement from investors who were happy to give its highly-experienced management team their money and then see what they could do with it.
A SPAC lists without any operations of its own. Its mandate is to use its capital to merge with or acquire other companies.
Earlier this year, Capital Appreciation announced its first deals with the 100% purchase of three fintech companies – African Resonance, Dashpay and Synthesis. The first two provide payments infrastructure, while Synthesis develops software and services for the financial services industry.
In the wake of these acquisitions, Capital Appreciation released a trading update this week to alert the market that earnings per share and headline earnings per share for the six month interim period to September 30 2017 “will reflect an increase in excess of 50% (1.08 cents per share) compared to the six month period ended September 30 2016 (2.15 cents per share)”.
While this is good news, the market didn’t seem to think it is good enough. The company’s share price has gone nowhere since the announcement.
Capital Appreciation’s stock is currently trading at around 73 cents per share, which is well below its listing price of R1. Year to date, it has fallen over 26%.
Banking on fintech
The company’s joint-chief executive, Bradley Sacks, is however bullish on its strategy.
“Our objective was not to have a portfolio of disjointed companies, but rather to invest into a specific and well-defined sector,” Sacks says. “We spent a lot of time evaluating opportunities and concluded that we needed a sector with good long-term growth prospects in South Africa and more broadly across Africa. Financial services and more particularly fintech lends itself very well to that.”
He believes that the fintech industry has very broad potential, and Capital Appreciation is approaching it from a clearly-defined viewpoint.
“We are not looking to be a consumer brand company, but rather a provider of infrastructure and enabling technology platforms that allow the people who do have large, established brands to do what they do better, more cost effectively, more innovatively and more efficiently,” says Sacks. “In payments for example, our primary customers at the moment are Standard Bank, FNB and Absa, and we don’t want to be viewed as a competitor to them. We are an enabler that allows them to do what they do.”
While this is a sector that is inviting a lot of interest and therefore increasing competition, Sacks sees this as positive.
“That there is competition demonstrates to me that the sector is one lots of people have identified as one with good growth prospects,” he says. “And that is fundamental to us.
“But there is also no monopoly on good ideas,” Sacks adds. “Having innovative people coming up with good ideas creates a wealth of acquisition opportunities for us because many start-ups don’t have access to capital, customer bases, leadership or networks, and we become a natural partner for them. I like the fact that there are very entrepreneurial people innovating in this space and we’re happy to offer them a home.”
Meeting in the middle
One of the challenges that the fintech industry has faced globally is the conflict between the cultures of large, very traditional businesses like insurers and banks, and the entrepreneurial zest of technology start-ups. Sacks however sees the potential for Capital Appreciation to find co-operative middle ground.
“I think across the world you had lots of banks who felt very threatened by fintech and tried to acquire it, but the cultural differences between the entrepreneurs and the large institutions lead to destruction of value and failures in implementation,” Sacks says. “But banks have started to learn that there is another way to embrace this technology and that is to partner with providers.
“The same is true with fintech providers,” he notes. “Many of them started with visions of becoming the de facto consumer standard only to find that it’s more difficult than they realised to gain customers and band name, and so it’s better to find symbiotic partnerships with large financial institutions. The two parts have come from opposing sides but are starting to come to the middle quite nicely.”
Sacks adds that Capital Appreciation still has more money to make acquisitions, and investors can expect more to come in due course.
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