Leading SME risk financier's results show solid investment deals but warn of stark challenges ahead

Ben Bierman

Over the past year, Business Partners Limited (BUSINESS/PARTNERS) - a leading risk financier for SMEs in South Africa and selected African countries - approved 327 investment transactions, amounting to over R1,14 billion, and, in the process facilitated the creation of 12 395 jobs.

This is no mean feat, especially in the context of the country’s subdued macroeconomic environment which prevailed over the period and fluctuating unemployment statistics in South Africa. However, going forward, the results also indicate eroding SME confidence levels and increased concerns around the servicing of debt - if economic and political uncertainty continues to prevail.

BUSINESS/PARTNERS financial results for the year ending March 2017, released today, showed positive investment activity, despite a period characterised by tough trading conditions for SMEs. “R1 147 million was approved for SME finance during our 2016/2017 financial year and while this is slightly under the target of R1,2 billion, the investment activity represents a satisfactory achievement in comparison to the 371 investments amounting to R1 107,4 million which were approved in the 2015/2016 financial period,” says Ben Bierman, MD of BUSINESS/PARTNERS.

“We anticipated a challenging period for SMEs in particular, and business in general. The economic uncertainty and lack of growth required enhanced due diligence and prudence in making sound investment decisions. A commitment to client service and post investment support became even more important as it became clear that SMEs were facing increasing pressure. In summary, a satisfying result.”

The company was able to successfully navigate the environment, control expenses and increase profits, says Bierman. Total income increased by 11,9 percent to R613,4 million, up from R548,2 million in the prior year. The net profit attributable to equity holders of Business Partners Limited for the year amounted to R207,1 million, a pleasing increase of R20,8 million (11,2 percent) from the R186,3 million profit reported in the prior year.

“We continue to actively explore how we can further service black owned businesses, so as to increase this number in line with our objective of responsible investing and the current national narrative of inclusive growth.”

Reviewing the economic landscape over the past financial period, Bierman says it has become clear how macroeconomic conditions impact an SME owners’ ability to navigate their environment.

“At the start of the financial year (April 2016), we were cautiously optimistic that the local economy was rebounding from Nenegate, and the subsequent economic fallout thereafter. Many indicators pointed to an improved economic environment for the following 12 to 24 months as commodity prices were on the increase, we had bullish expectations that the drought had broken and that the agricultural sector would again positively contribute to the local economy, and that politically, there was stability in the finance team,” says Bierman.

However, the level of distress amongst our SME client base increased, which materialised in a sharp increase in credit losses.

Net credit losses increased by 90,4 percent to R81,0 million (2016: R42,5 million). Realised credit losses in the form of bad debts increased by 87,5 percent to R 63,9 million (2016: R34,1 million).

Bierman explains that the material increase in the credit losses reflects the continued impact of slow growth, policy uncertainty and other adverse economic conditions prevalent over the past two financial periods.

“Credit risks and signs of distress were noticed from July last year and continued to deteriorate into the first quarter of 2017. However, this distress typically builds up over a three, six and potentially nine month period as many SMEs initially seek out alternative methods to adhere to debt payments. This means that cash flow constraints slowly increase until they can no longer keep up with payments, and that is when the true position faced by the SME becomes even more apparent.”

Bierman adds that, as a result, many South African SMEs likely haven’t yet felt the full impact of the recent Cabinet reshuffle and subsequent downgrade, which turned the country’s economic improvements on its head during the first quarter of this year. “In the coming months, BUSINESS/PARTNERS will focus on assisting struggling SMEs with technical assistance to support specific management functions as well as business turnaround support, with the sole aim to aid business owners to overcome such periods.”

Looking ahead, Bierman says that the requirement for policy and political certainty is essential as the impact of the macro environment on SMEs becomes an even greater force than ever before.

He points to the Business Partners SME Index which showed that after steadily gaining confidence levels last year, there was a sharp decrease during the first quarter of 2017 which illustrates the extent to which instability decimates SMEs’ confidence to grow their businesses, employ more people and manage their cash flow.

“In uncertain times, it is important for organisations, such as BUSINESS/PARTNERS, to shape an environment that is conducive for SME growth. A focus area for us as responsible corporate citizens, will be ensuring that clients are supplied with investment solutions that are best suited to support their business profitability and expansion going forward,” concludes Bierman.