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Quietly investing into the industrial base of the economy

The Ethos ‘partnership has really served to provide us with a great platform’ – Itumeleng Kgaboesele, CEO of Sphere Holdings.

SIKI MGABADELI:  Good evening and welcome to this special edition of the SAfm Market Update with Moneyweb, where we speak to captains of industry about their area of expertise. Much has been said about the need to reindustrialise our economy, but how much of that is actually going on, and who is doing it?
    My next guest is uniquely placed to give us some insights as he and his partners have been quietly investing into the industrial base of our economy. His name is Itumeleng Kgaboesele, who is a co-founder and CEO of Sphere Holdings. The company founded in 2003 is an investment holding company, driven to create value for funders, shareholders and business partners. Itumeleng, thanks so much for your time today.

ITUMELENG KGABOESELE:  Thank you for having me.

SIKI MGABADELI:  Take us back to the very beginning. You were an investment banker for a number of years and then you and your partners decided to start a private equity fund.

ITUMELENG KGABOESELE:  Correct. After spending about seven years in investment banking, having qualified as a chartered accountant before then, I took the view that really I wanted to move from being on one side of the table as an adviser to being on the other side as a principal. So we decided in 2003 to launch Sphere Holdings and really with a dual strategy – one, to build an on-balance-sheet business and also to raise a fund and manage a classical third-party private equity fund.

SIKI MGABADELI:  Okay. So looking at the on-balance-sheet part of the business, was it always your intention to invest in industry?

ITUMELENG KGABOESELE:  To be honest, if I said that, I don’t think that would be true. I think we wanted to build an investment-holding company. We sought to identify good businesses across different sectors and to back those management teams with some capital and provide them with some of our expertise, and work with them to really build those businesses. But at that time we were much more flexible in terms of which sectors we were going to focus on.

SIKI MGABADELI:  All right. So was there a space that you had identified at the time in terms of working with businesses and doing that side of the business? Or what motivated you to start Sphere?

ITUMELENG KGABOESELE:  I co-founded the business with others when I was 31. When one is so relatively young you’ve got ambitions of changing the world and you’ve got ambitions of creating wealth.
    I think what I was clear on, and what my partners were also clear on, is we wanted to build a new type of black economic empowerment investment holding company. We in fact styled ourselves as a new-generation investment holding company and we said “new generation” in that we wanted to utilise our expertise, utilise our experience that we had gained in investment banking, in private equity and in the legal field, to really work with management teams and add value to the businesses that we were going to invest in.

SIKI MGABADELI:  How did you go about raising money?

ITUMELENG KGABOESELE:  We were quite fortunate in that our initial seed capital came from a combination of our own savings from the work that we had previously done. We were also then backed by one of the financial institutions. Nedbank provided us with some seed capital to get our business going.
    And our approach in those early days was that over and above seeking to build an investment holding company and an private equity firm, we would then leverage off the skill set that we had, being from the advisory field, and would seek to effectively in the short term earn advisory fees that would help pay for the water and lights as we were looking to build the business.

SIKI MGABADELI:  Tell us about those early days. Did you have moments when you thought what were we thinking?

ITUMELENG KGABOESELE:  Looking back, I think if anyone came to me as an early-thirties guy with the business plan or the ideas that we had and told me that they wanted to build a business, I’d quite frankly have told them to remain in their jobs and stick to what they were doing. But you are young, you are ambitious and, quite frankly, I think the country also provided an enabling environment.
    It was not easy initially to raise capital, but we were quite fortunate to leverage the network that we had and also put together what we believed to a compelling investment case for a fund to work with us.
    Luck played a great role in enabling us to raise the capital to get the business going.

SIKI MGABADELI:  Obviously a lot of hard work came in with that as well. Tell us about the relationship with Ethos from the beginning.

ITUMELENG KGABOESELE:  We were quite clear that we wanted to raise a third-party fund. What do you need to raise a third-party fund? I think, one, you need to at the very least demonstrate that you’ve been in private equity and that you’ve got a track record. We were quite fortunate at that stage to have relationships with a number of the Ethos partners and we jointly came to the decision as Ethos and Sphere that we would partner up to form a partnership that would enable us, as Sphere, to raise our first funds, partially leveraging off their track record, and would also enable Ethos to partially empower their business and be better positioned to raise at that time a fifth pool of money, the Ethos Fund V. So it was really a win-win partnership that we struck up.

SIKI MGABADELI:  And is that partnership still ongoing?

ITUMELENG KGABOESELE:  The partnership was restricted to Sphere Fund I, our first fund, and restricted to Ethos Fund V, We still have some residual investments in Sphere Fund I and we continue to have an interest in Ethos Fund V. They have gone on to subsequently raise Fund VI.
   As you know, we have now decided to focus really on building our balance-sheet business with a much longer-term investment horizon. And really we are looking to work with our management teams over the long term and build those businesses over the long term.

SIKI MGABADELI:  What was the very first business you invested in?

ITUMELENG KGABOESELE:  Our very first business was an engineering business that does plant maintenance. At the time that we invested in it we were quite oblivious to what the future would hold for that business – and in fact for the country. So our first investment was in the Babcock Engineering business. What they actually do today is they are responsible for the maintenance of boilers at Eskom power stations, and at the power stations that generate about a third of our country’s coal-fired power supply.

SIKI MGABADELI:  Goodness.

ITUMELENG KGABOESELE:  So at the time this was 2004. I think none of us anticipated where we would be today. So clearly it’s a business that we take very seriously. It’s a business that plays a really critical role in powering up our country, and it’s an investment that we are proud of.

SIKI MGABADELI:  How did the approach happen? Did they come to you? Did you go to them? How did that typically happen?

ITUMELENG KGABOESELE:  The Babcock approach was really through our networks. They had a need to empower their business and we had a need as a new investment company to start putting some rands on the board. We were at that stage fairly sector-agnostic, so we were prepared to look across sectors. But that partnership has really served to provide us with a great platform and it is a platform that we are leveraging today to try and build ourselves into a bigger investment holding company.

SIKI MGABADELI:  So that was what – back in 2004?

ITUMELENG KGABOESELE:  That was in 2004, correct.

SIKI MGABADELI:  We now are in 2105. You are still in this business. That’s quite a long-term approach then, instead of the typical five- to seven-year sell-out, and moving on to the next thing.

ITUMELENG KGABOESELE:  Absolutely. I think the partnership has worked extremely well for us, and one of our core values as a business is that of partnership. We really seek to build long-term enduring partnerships with management teams and fellow shareholders whenever we are getting into a business. And it’s a partnership that we are extremely proud of. It has worked well for the business and it has also worked well for Babcock and ourselves as investors and is a partnership that we are in fact looking to take to another level, looking to continue building on this great platform.
    All right, I’m going to pick up on that and get a sense of what typically these small, medium sized enterprises in this country tend to lead. Often when we speak about entrepreneurship, when we speak about small businesses, people say, oh, they need funding. But clearly there is more in terms of expertise and other resources that businesses need.

SIKI MGABADELI:  Sphere Holdings is today a majority black-controlled and -managed business, boasting 71% black ownership, including 31% women ownership.
    Itumeleng, I want to talk a bit about empowerment. I want to talk about your approach to that and what it has meant being 71% black-owned and having a third of your ownership also being in the hands of women.
    But just going back to the points we were talking about a little bit earlier, what have you found in these businesses that you’ve invested in? What is it that they initially need? Is it money?

ITUMELENG KGABOESELE:  I think we must confess that in a South African environment a lot of these businesses have initially approached these kind of partnerships from a compliance perspective, saying that they need to be BEE because they need to comply with legislation or they need to comply with customer requirements. What we have sought to do in the businesses that we have invested in, we have sought to provide them with capital to expand their businesses. And at times we’ve sought to provide capital for investors that are looking to sell out, because they’ve been in the business for a long time.
    Over and above the capital that we’ve brought to the businesses, we’ve also sought to really provide them with our own expertise and the experience that we have and to really work as partners with the management teams, to look to take the businesses to another level. That could take the form of taking them into a new market sector where they have previously not been, or it could be in terms of working with the management team to identify acquisitions that may provide the businesses that we invested in with an opportunity to really acquire other businesses, become bigger businesses and be able to offer a broader set of either goods or services.

SIKI MGABADELI:  And you’ve found that that approach actually works. Is it something you can apply in each business?

ITUMELENG KGABOESELE:  Absolutely. That approach has worked extremely well for us. I think it has worked well for us partially because a lot of the businesses that we have invested in happened to serve a fairly common customer base. So they would be having a common customer base comprising customers that are in the petrochemical sector or in the energy sector or in the transportation sector. And we have a unique advantage, being exposed to these individual businesses, of knowing quite a lot of what is going on at the different customers. So we are able to effectively leverage the experience and the knowledge that we then have about the broader customer base for the benefit of each business.

SIKI MGABADELI:  I mentioned that there is a lot of talk at the moment about the need to re-industrialise our economy. The Minister of Trade & Industry is driving a big push towards building a core of black industrialists. So, with your experience, with what you’ve seen among those companies that are operating in that space, what do we need to do to scale that up?

ITUMELENG KGABOESELE:  I think there are a number of things that can be done and I think the state, through its various agencies, has a great role to play. In our experience we’ve got businesses that supply some of the major state-owned enterprises such as Eskom and Transnet. And, with respect to Transnet itself, one of our businesses has been a big supplier of rail fasteners to Transnet.

SIKI MGABADELI:  What’s a rail fastener?

ITUMELENG KGABOESELE:  Just imagine a railway track and then imagine a sleeper – the sleepers that go onto a railway tack – and then think about the clips that fasten the sleeps onto the tracks.

SIKI MGABADELI:  Oh.

ITUMELENG KGABOESELE:  It’s fairly small but extremely critical from a safety perspective. So it plays an important role in the movement of goods on our rail network.
    But the point that I was keen to make is that because of the support that this business has enjoyed from Transnet as a key supplier, this business is able to make sure that its factory is relatively full and benefits from scale. And because of that we are then able as a business to compete against other businesses on the continent, and we have won work in Mozambique, in the DRC, and in Botswana against other competitors. So the fact that we are able to be a strong supplier to a state-owned enterprise has enabled us to then achieve the scale that enables us to compete outside this country.

SIKI MGABADELI:  Okay. So absolutely the point around …but our state-owned enterprises, but also identifying opportunities that government could open up for industry would work both ways.

ITUMELENG KGABOESELE:  Absolutely. And, Siki, it does not necessarily just apply to the government. It applies to local industry procuring locally. By procuring locally you can enable local suppliers to be strong suppliers and you can enable them to then compete for work outside this country and earn export revenues.
    But clearly on the other side, as a local business and as a local supplier, what we need to do is make sure that we continue to invest in our facilities, invest in training our workers, so that the products that we serve to our local customers are globally competitive from a price perspective and are of a global standard.

SIKI MGABADELI:  You mentioned the rest of the continent. Are you finding that opportunities are opening up a lot more? If we were to really get this intra-Africa trade thing right, how  do you see that opening up?

ITUMELENG KGABOESELE:  What we have seen in the businesses that we have invested in, our experience has been that the businesses that are fairly strong in the South African environment are then able to also deploy resources to grow into the rest of the continent.
    Having said that, it is not easy. I think competition is fairly tough. There is a lot of interest on the continent from other suppliers that do not come from this continent – be they Chinese, Indian or European. But there are certainly still opportunities for South African businesses on the continent.

SIKI MGABADELI:  Talking again about industrialisation, do you think that we are going to get it right? Is there interest? Are South Africans keen to get into the nuts and bolts and the cogs that keep an economy going?

ITUMELENG KGABOESELE:  My belief is that entrepreneurs will find opportunities where opportunities exist. I think clearly if there is an operation for a product to be manufactured in South Africa competitively an entrepreneur will get that done. There are certain products where, as a country, we do not have a competitive advantage and as a country we will continue having to import those from elsewhere

SIKI MGABADELI:  Let’s talk about black economic empowerment then. What’s your approach, what are your views on empowerment?

ITUMELENG KGABOESELE:  I think as a country, given our legacy, the country needs to transform. We need to build a more inclusive economy. Having said that, I think I also recognise that as a BEE investor or as a BEE company we too have our responsibility in giving back.
    So specifically within the Sphere context, we made sure that when we started our business we gifted a significant portion of our shareholding to four broad-based national groups that are involved in education, healthcare and work with disabled persons. So as we become more successful as founders of the business and as management shareholders in the business we create value for them. And that is something that we are extremely proud of.

SIKI MGABADELI:  And how do you keep track of that?

ITUMELENG KGABOESELE:  It’s fairly easy to keep track because there are four organisations that are identifiable that have a shareholding in Sphere and, once Sphere declares a dividend, when they pay me as a shareholder my dividend, there are four different organisations also that get their dividend. So it’s very, very easy.

SIKI MGABADELI:  In terms of the actual impact on the individuals that those organisations represent, how do you keep track that their lives are actually being changed?

ITUMELENG KGABOESELE:  The organisations that are shareholders are fairly well governed. They run great programmes.
     And one of the organisations I have personally been involved with, in fact predating my co-founding of Sphere, is called the Student Sponsorship Programme [SSP]. What we do in a nutshell, we identify through that programme academically talented students from low-income households and we provide them with mentorship and funding to go to some of the very best high schools in the country.
    Last year we were extremely proud at the end of December 2014 when one of our young students, a guy by the name of Ayanda Nyathi who grew up in Alex, matriculated from St Stithians as an SSP scholar. He was deputy head boy of St Stithians in his final year and for his matric got eight distinctions. So a great, great talent.

SIKI MGABADELI:  That is phenomenal. And this is someone who would never have had that opportunity at all.

ITUMELENG KGABOESELE:  Correct. And what pleases me even more from a Sphere perspective is that not only are we as Sphere passionate about the programme, but quite a number of our businesses have, subsequent to our investing in them, become big donors for SSP.
    And in fact, just going back to Ayanda’s story, Ayanda is now a first-year student and, as we sit here today Ayanda as an engineer is finishing his vac work at one of our businesses. So it really comes full circle.

SIKI MGABADELI:  So you are able, I suppose, to intervene at different levels – the schooling level but also at the point where he gets an opportunity to be exposed to the world of work – he, along with others as well. That’s phenomenal. So where are we now and where do we want to go?

ITUMELENG KGABOESELE:  Over the last few years we’ve built a great platform but we continue to be excited about opportunities in this country. So we’re looking to take our business to the next level.
    At the beginning of March we announcement that Jabu Mabuza had acquired an interest in our business and become the executive chairman of Sphere. And part of doing that transaction was to bring someone with his track record, with his experience, into our business to strengthen our business and to become one of our partners as we look to build an enduring business.
    Our vision is really to build a leading investment holding company that is black-controlled, that is focused on industrial goods and services, and to play our role in transforming this country.
    In the very short term, to enable that we are looking to raise capital, we are looking to raise R1bn of capital and we are really looking at quite a number of interesting opportunities where we hope to deploy that capital.

SIKI MGABADELI:  And how are you looking to raise that billion rand?

ITUMELENG KGABOESELE:  We are looking to raise that capital as a combination of equity in Sphere Holdings itself and some debt on our balance sheet. And we are fairly confident that, given our track record of delivering really exceptional returns for investors in our fund, we are confident that we should be able to raise the capital.

SIKI MGABADELI:  How do you measure your success?

ITUMELENG KGABOESELE:  A very good question. I think in different terms. Success for me is the value that we have created for shareholders in Sphere. Starting our business with the seed capital that we had and creating an investment holding company with interests in companies that provide critical goods and services to this country is a measure of success.
    But success for me equally is the story that I just told you of young Ayanda going from Alex to St Stithians and matriculating with eight distinctions and working at one of our businesses that support the programme. I think a business such as ours has the opportunity to play its role in transforming this country. And I think what really excites me as an individual is that Sphere has provided the platform to marry my passion of building a business and my passion of transforming this country through education.

SIKI MGABADELI:  Thank you for sharing your story with us.

ITUMELENG KGABOESELE:  Thank you for having me.

To watch the interview with Siki and businessman Itumeleng Kgboesele, please click here. 

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