In the current economic times, few would consider extending credit to minibus taxi owners or SMEs, let alone acquire distressed book debts. But in so doing Transaction Capital, since listing in 2012, has consistently achieved CAGR in earnings per share of 20%, with dividends per share growing even faster, at 33%. And just last year the organisation posted core headline earnings up 18% to R682 million.

The group achieved its results through two divisions: SA Taxi and Transaction Capital Risk Services (TCRS). They are completely separate and diversified business platforms, but both are deliberately positioned to align to socio-economic dynamics in the delivery of financial services to highly specialised and underserved markets. Point in case is the minibus taxi industry. Up until the formation of SA Taxi in 1998, it was an under-valued market but as David Hurwitz, CEO of Transaction Capital highlights, it has self-sustained over decades – emerging as commercially viable and innovative. ‘With 15 million trips daily, the minibus taxi service is currently the dominant form of public transport in South Africa, surpassing – by 13 million – the combination of bus, BRT and train trips. Despite this, traditional financial institutions generally consider the granting of credit to minibus taxi operators as risky given that owner/operators are largely self-employed, with no set accounting systems nor credit history.’

In fulfilling this critical funding gap, SA Taxi developed a vertically integrated business platform, operating on the premise of inclusive growth. It offers the minibus taxi sector a comprehensive range of financial, insurance and allied services inclusive of vehicle and parts procurement, retail, repossession and refurbishment plans, and loyalty programmes. ‘The risk we take is minimised because we thoroughly understand the asset class and value the taxi-market’s experience. We leverage our proprietary data and technology platforms through a credit-vetting and underwriting philosophy, all of which allows a low actual ultimate loss in SA Taxi’s income statement,’ says Hurwitz. ‘In this way we are supporting entrepreneurs who would otherwise remain outside the formal economy, and simultaneously helping to boost job creation.’

Since SA Taxi entered the market, it has created 130 000 direct jobs. It has originated R21.9 billion in loans and led to the formation of 72 423 SMEs. This is underscored by an additional R596 million in loans that the TCRS division provided to black-owned SMEs last year. TCRS, meanwhile, essentially acts as both a principal in acquiring and then collecting on non-performing loan portfolios, and as an agent on an outsourced contingency or fee-for-service basis from other financial and credit-facing businesses, in SA and Australia. TCRS’ main activity in SA lies in the acquisition of distressed book debts, which assists clients to strengthen their balance sheets by accelerating cash flow and removing non-performing loans, which furthermore improves their ability to continue to provide debt finance to the consumer market.

At its core, however, TCRS is focused on assisting and rehabilitating indebted consumers and improving the lending/credit environment. ‘We help consumers understand the importance of repaying loans, and structure their repayments in a manner they can afford. This allows them to remain active in the credit system,’ says Hurwitz. ‘Similarly, we assist our clients to lend more responsibly by identifying consumers that are good credit risks and therefore [they] can collect on loans successfully. This method supports the affordability of credit by mitigating unnecessary pricing for risk. It’s also been good news for SMEs that might otherwise not have had access to capital financing.’

TCRS’ strategy of augmenting management competencies, implementing TCRS’ business information, payment automation and collection technologies, has worked as effectively in Australia as it has in SA. Now Transaction Capital is looking to take the model to Europe. ‘The European specialised credit market presents an attractive opportunity to leverage the TCRS business model. Over recent years, TCRS has created a partner network of specialist credit managers, alongside whom we will co-invest to acquire a diversified portfolio of specialised credit related assets over time,’ says Hurwitz. ‘This strategy will give Transaction Capital and its shareholders unique access to niche European specialist credit managers, without concentration risk in any particular portfolio, asset class, asset originator, collection platform or geographic market.’

Hurwitz explains that although the capital it has earmarked for the European growth opportunity is small in proportion to Transaction Capital’s asset base, it will further diversify TCRS’ earnings base and, as a result, TCRS expects to deliver double-digit hard currency risk-adjusted interest returns. ‘For a relatively small initial investment, the added benefit of gaining a deeper understanding of the European collections industry, with the potential to participate in emerging opportunities in future, is already proving meaningful,’ according to Hurwitz. ‘In time, we intend to build and operationalise a scalable business platform to achieve capital appreciation and manage our European assets, leveraging off TCRS’ high South African IP and know-how and its low-cost collection infrastructure combined with leading technologies.’

By Kerry Dimmer