How to create SME portfolios when managing risk and return?
The idea of creating a flagship, ESD SME portfolio in response to the BEE codes is appealing indeed. A single strategy, adopted across the organisation, limiting the demand on the time of senior executives, and creating a consistent and certain reporting and compliance format for verification, is a dream for most companies.
Yet, how and where do you start? And, if you do it, how do you assess the capability of your service provider to deliver on the promise, meet the expectations of your organisation and comply with the ESD provisions whilst generating a return from SMEs?
SMEs, most by far, are locked and loaded to fail. In fact, 94,6% of businesses started never get sold. They close down. Building an SME portfolio is not trivial; managing the risk and return dynamics of a portfolio, is even less so. The best place to begin is with organisational buy-in. Adopting a medium-term ESD strategy is crucial. SMEs take time to grow, take time to mature to a point where you can invest in them, and even more time to accumulate the value in the underlying equity and get to a point where you, as an investor, can viably exit, to harvest a return. Time is needed in this process. Beyond a medium-term commitment, the organisation has to offer investable supply chain opportunities.
You will not build a cleaning, catering or gardening services business to value. These are commoditised services and offer no investablity unless it's your darling son, daughter, mother or cousin. An investable business is one that can be built into an Asset of Value and must be offering products or services core to your corporate organisation. Your demand for their offerings are as important as your ability to build scale and robustness into the SME supplier. This is a crucial component to manage risk and return in your SME investment portfolio.
At Aurik, we started as a venture capital business incubator. We struggled in 2001. We struggled to get the deal flow so that we could invest in the best. We struggled to work with entrepreneurs who wanted advice that they never took. We struggled to support SME scaling and robustness because these businesses are so under-capitalised and under-resourced. So we abandoned our approach and instead started to build and sold 12 businesses over a nine-year period. We achieved, after two failures, two listings on the JSE and 8 sales, an IRR of 44,2%. Most importantly, we learnt how to source, select and support accelerated growth in entrepreneurial businesses.
After working with over 1,500 SMEs built into corporate supply chains, we have learnt how to get this job done successfully. Building an SME portfolio is rewarding in terms of supplier performance, ESD and BEE compliance and it's financially rewarding to if done right. Work with us to get these outcomes and turn your ESD compliance costs into a strategic, business return.