Wealth Creation through Group Investments"

January 17, 2013 Tony Wainaina

Table of Contents
page 1. 2. 3. 4. 5. 6. 7. 8. Background Why invest as a group? Investment group principles Critical failure factors Shifting mind-sets Creating savings to invest Administration & management Transformation: Beginning the journey 5 9 20 22 25 27 29 36

Table of Contents
page 1. 2. 3. 4. 5. 6. 7. 8. Background Why invest as a group? Investment group principles Critical failure factors Shifting mind-sets Creating savings to invest Administration & management Transformation: Beginning the journey 5 9 20 22 25 27 29 36

1. Background
Value of wealth held by investment groups in Kenya (savings & investments) is currently approx. KShs100 billion (USD1.1 billion) according to Kenya Association of Investment Groups and growing. One in every three adults in Kenya is a member of an investment group according to KAIG.

1. Background
Strong cultural impetus behind pooling funds as groups to investstrong fundamental affinity to save and invest. Very successful SACCO movement has been saving to borrow Investment groups play a major role in wealth creation but the efforts are by and large very fragmented and very disorganisedcreating wealth significantly below potential. To achieve the potential of becoming significantly greater wealth creators, investment groups must take a step back and address a number of fundamental issues and challenges.
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How have successful investment groups done it?

Hard work - genuine commitment Dedicated management teams Strong governance structures Clear strategic plan Ecient decision making through delega<on to an IC that works closely with management for execu<on. Commitment to raising capital for inves<ng Strong deal pipeline- Best deals brought to the group
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Table of Contents
page 1. 2. 3. 4. 5. 6. 7. 8. Background Why invest as a group? Investment group principles Critical failure factors Shifting mind-sets Creating savings to invest Administration & management Transformation: Beginning the journey 5 9 20 22 25 27 29 36

2. Why invest as a group?

Peer pressure works Committed contributions difficult to withdraw Signed an agreement Capacity to raise more money & invest in bigger projects Combining several valuable skills

2. Why invest as a Group?

(Whats in it for Me?)
Average Gross Investment Values for Holding Periods of 1 to 15 years (contribuAons stop aBer year 5)
monthly contribution annlzed return* 0.0% current account 1.6% savings account fixed deposit 4.6% account 7.5% 91 day T-Bill 9.8% Stockmarket (NSE) 40.0% Investment Holdco 15,000 Year 1 180,000 181,607 540,000 553,873 (all figures in KShs) 3 900,000 938,544 5 10 900,000 1,018,691 15 900,000 1,105,682

184,549 187,532 197,640 252,000

580,065 607,705 652,924 1,098,720

1,013,619 1,096,116 1,201,817 2,758,291

1,275,180 1,596,782 2,018,158 15,064,610

1,604,236 2,326,136 3,320,974 81,250,944

Individual-type returns

group-type returns

* Average annualised returns over the past 5 years(10 years for the NSE) These gures are not adjusted for inaAon 10

1. Case studies
Case study 1: Unathi Investment Ltd.
Unathi (God is with us in Xhosa) was formed in 2007 when 1 lady came up with the idea of bringing a group of women together to save and invest for re<rement. By the end of 2007, 19 women in their early 30s had signed up to became shareholders. KES1.4 million was raised by the end of 2007. Monthly contribu<ons started at KES 10,000 (USD 150) and by the end of the rst year - 2007, total contribu<ons, which were all capitalised, stood at KES 1,405,000. From 2007 to 2010, the value of their contribu<ons exceeded the value of their por[olio - making a loss on their investments. In 2010 they carried out their rst detailed strategic planning workshop. By the end of 2011, the value of the por[olio (KES16.6 million)exceeded the value of contribu<ons (KES13.5 million) - making a posi<ve return on their investments.

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1. Case studies
Learnings from the Unathi case study
Invite like / business-minded individuals to join the group: Not everyone in the group needs to know each other from the outset. This approach improves the probability of a business rather than social agenda being adopted from the very beginning. Learn from failure, and move on: A`er the failed investment aaempt that lost them a substan<al amount of money Unathi learnt the meaning of being well prepared to borrow from banks. Develop and implement a strategic plan: Unathis rst comprehensive strategic plan was developed in early 2010. The group started implemen<ng the key result areas almost immediately and within 24 months, had achieved a por[olio value greater than the total contribu<on levels, for the rst <me in their history. Professionalise management: Disengaging the shareholders from the direct management and administra<on func<ons of the group was key to ini<a<ng Unathis transforma<on between 2010 and 2011.
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1. Case studies
Learnings from the Unathi case study
Maintain a strong savings culture: Most members have maintained monthly contribu<ons from the beginning - even in the dicult years when the viability of Unathi as a long-term investment vehicle was uncertain. Corporate Governance: Over they years governance strengthened gradually, and in 2010 a board of directors was cons<tuted with terms of reference for the board and for the board commiaees. Leverage your capital base: Even a`er a failed rst aaempt to borrow investment capital in 2009, Unathi persevered and succeeded in securing a loan facility in 2011 for the purchase of 3 proper<es. Leverage (borrowing money)was key to growing their por[olio value by almost 150% between 2010 and 2011.

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1. Case studies
Case study 2:
Trans-Century is recognised as probably the most successful investment group in East and Central Africa. Origins and development over its 14-year history clearly demonstrate the real poten<al of home-grown investment groups to transform into a large, regional, and protable investment holding company. At the beginning, a sugges<on was made to form a group whose collec<ve skills and networks could be leveraged to do what would be far more dicult for an individual to achieve. 50 prospec<ve members (inclusive of the original 7) were invited to invest KES500,000 each; 29 accepted - ini<al capital of KES24 million was raised. By December 31, 2011 the total assets of the company stood at KES21.7 billion.

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1. Case studies
Learnings from the Trans-Century case study
Professionalise management: A high quality full-<me compe<<vely recruited management team was recruited in line with the 2006 strategic plan. Devote substanAal quality Ame to managing your investment group: Before engaging full-<me management, Trans-Centurys chairman and vice- chairman devoted over 50 percent of their <me to managing the aairs of the investment group. High quality service providersin accountancy, audit, tax, company secretarial services, legal maaers and corporate nancewere engaged from the beginning. Develop and implement a strategic plan: Ever since Trans- Century began to develop strategic plans, the implementa<on of these plans has been closely monitored and the plan has been reviewed every 2-3 years.

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1. Case studies
Learnings from the Trans-Century case study
Build long-term value: Trans-Century has consistently pursued a strategy of buying, driving value and holding strategic investments. Think big: Trans-Century has pursued an aggressive investment expansion programme across the African con<nent. They evolved into a public company and eventually listed on the Nairobi Stock Exchange. Learn from failure: A`er par<cipa<ng as a minority investor with minimal rights in the Castle Brewing Kenya Ltd. venture that folded a`er only 4 years, Trans-Century decided to focus on acquiring majority stakes in companies they could acquire full informa<on on before deciding to invest, and control upon investment. Bring the best deals to the group: There is an unwriaen agreement among the founder shareholders to bring aarac<ve investment opportuni<es to the aaen<on of the group.

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1. Case studies
Learnings from the Trans-Century case study
Leverage your capital base: Trans-Century pursued an investment funding approach that relied quite heavily on money borrowed from banks. This enabled them to achieve a signicantly larger investment por[olio than they would have, without dilu<ng their shareholdings or commijng addi<onal capital - which would have been the case if they had relied only on share capital. Cash is king: It is important to focus on cash genera<on (e.g. East African Cables is one of the NSEs best dividend payers in history). Too many Investment groups <e up their capital in non income genera<ng assets (eg. undeveloped plots of land) for too long. DiversicaAon: Trans-Century has diversied geographically (now in over 10 countries), by sector (power, transport and engineering) and by customer base and product.

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Trans-Century at a glance
Controlling interest

Minority stake

Cableries do Congo, SPRL Pende Electrical, Zambia

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Table of Contents
page 1. 2. 3. 4. 5. 6. 7. 8. Background Why invest as a group? Investment group principles Critical failure factors Shifting mind-sets Creating savings to invest Administration & management Transformation: Beginning the journey 5 9 20 22 25 27 29 36

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3. Investment Group Principles

Commitment (financial & non-financial) Vision Governance Trust

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Table of Contents
page 1. 2. 3. 4. 5. 6. 7. 8. Background Why invest as a group? Investment group principles Critical failure factors Shifting mind-sets Creating savings to invest Administration & management Transformation: Beginning the journey 5 9 20 22 25 27 29 36

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4. Critical Failure Factors

1. Not shifting your mindset: shortterm not long-term; small not big 2. Not having a documented purpose and vision (strategic plan) 3. Letting all the members, not a smaller board drive the group: Not separating ownership from management 4. Not professionalizing - management & execution of investments. Relying on office-bearers to do everything

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4. Critical Failure Factors

5. 6. Only save/contribute what you can afford to lose Not respecting the distinction between business and friendship Not formalizing / legalizing the relationship
Shareholders agreement Auditor, company secretary (submit annual returns) Issue share certificates

7.

8.
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Weak leadership

Table of Contents
page 1. 2. 3. 4. 5. 6. 7. 8. Background Why invest as a group? Investment group principles Critical failure factors Shifting mind-sets Creating savings to invest Administration & management Transformation: Beginning the journey 5 9 12 22 25 27 29 36

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5. Shifting Mind-Sets
From
[Social] Investment clubs & merry go rounds Small Why? Short-term get-rich-quick Foreign direct investment
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To
[Business] Investment holding companies Big Why not? Long-term wealth creation Local direct investment

Table of Contents
page 1. 2. 3. 4. 5. 6. 7. 8. Background Why invest as a group? Investment group principles Critical failure factors Shifting mind-sets Creating savings to invest Administration & management Transformation: Beginning the journey 5 9 12 22 25 27 29 36

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6. Creating Savings
Saving to borrow (for short-term) exists - SACCOs. Must develop a culture of saving to invest (for long-term) Change mind-set from of savings as spare cash to paying a bill, school fees Your family and you & are the most important person to you - so pay yourself first Develop the habit of saving - repetition and sacrifice But results must be seen along the way (performing investments) to encourage continued saving
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Table of Contents
page 1. 2. 3. 4. 5. 6. 7. 8. Background Why invest as a group? Investment group principles Critical failure factors Shifting mind-sets Creating savings to invest Administration & management Transformation: Beginning the journey 5 9 12 22 25 27 29 36

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8. Administration & Management of the Investment Group

Before engaging or outsourcing full time management and administration, the investment group

MUST DEVELOP A STRATEGIC / INVESTMENT PLAN FIRST!!!!

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8. Administration & Management of the Investment Group

Why do we need Full Time Administration & Management?

q Not-For-Prot social venture or a For-Prot business venture - DECIDE!! q Every member has a full-time paying job q Spare Time Commitment = Spare Change Returns q No company has every succeeded with part-time management

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8. Administration & Management of the Investment Group

A. Administration of Investment Groups
i. ii. iii. iv. v.

Convening and recording meetings Record keeping Accounting, banking, ling returns Transacting with professional service providers Communication

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8. Administration & Management of the Investment Group

B. Management of Investment Groups

i. ii. iii. iv. v. vi. vii. viii.

Investment portfolio management Sourcing good quality investments Performing high level due diligence Professional service providers Preparation for board/commiOee meetings Positioning the Group as a preferred investment partner Implementing your strategic plan Communication
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8. Administration & Management of the Investment Group

C. Execution of Investment Transactions
i. ii. iii. iv. v. vi. vii.

Formalizing your decision to invest Funding the investment: equity & debt Documentation conrming nal investment Professional service providers Investment closure checklist Legal considerations & risks The property investment execution process
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Table of Contents
page 1. 2. 3. 4. 5. 6. 7. 8. Background Why invest as a group? Investment group principles Critical failure factors Shifting mind-sets Creating savings to invest Administration & management Transformation: Beginning the journey 5 9 12 22 25 27 29 36

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Level 3

Investment Group Development Path

Aairs of your Investment Group placed in the hands of a full-<me, dedicated team of professionals

A & M

Mature

Mid - Level

Starter Toolkit
Designed to establish an investment group with a strong, well- structured founda<on

Designing the appropriate structure for your group based on your objec<ves

F & R

Focuses on iden<fying eec<ve investment strategies according to the groups risk appe<te and nancial goals.

Investment Planning

Level 1

Early
Starter Toolkit 1 2 FormaAon & Structuring 3 4 Investment Planning 5 6 7 8 9 10 AdministraAon & Management 12 Own Management 11

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Portfolio size

Level 2

9. Transformation: Beginning the Journey

Stage 1:

Stage 2:

Stage 3:

Stage 4:

Establishment

FormaAon & Structuring

Strategic Planning

AdministraAon & Management

There are no shortcuts - follow the process Invest heavily in the process - the outcome will take care of itself
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Wealth Creation through Group Investments"

January 17, 2013 Tony Wainaina