A decade ago, the founders of Crossfin formed part of a small-cap JSE company that reeled under the financial crisis of 2008; this week, their fintech company received a big nod from Patrice Motsepe’s African Rainbow Capital (ARC) and Ethos, a private equity investment firm.
On Wednesday, ARC announced that it was, together with Ethos buying out Crossfin in a R1.5 billion deal that is said to be one of the most significant transactions in the financial technology sector in South Africa.
The deal comprises a consortium of entities, including ARC Financial Services (50.1% owned by ARC itself and 49.9% owned by its ARC Fund), led by the Ethos Market Fund I.
ARC said it would pay R600 million or about 9% of its market cap for a 37.33% stake in Crossfin.
The genesis of Crossfin
After struggling to recover from the financial crisis of 2008, UCS went through a period of divestment where Sparrow and Gaylard spearheaded the sale of most of the company to information and communications technology group, Business Connexion.
“And what was left behind no longer warranted a listing. So, we delisted that vehicle, and essentially it was worth a net asset make up of about R100 million,” Sparrow told the Business Insider South Africa.
UCS was later renamed Capital Eye Investments, and Crossfin forms part of its portfolio investments.
Using the capital, they had available to them and some that they could generate, the pair decided to branch out from being a niche financial technology provider for the retail sector and tapped into financial services to service the banking and insurance industries.
That led them to one of its biggest success stories; its 2012 investment in iKhokha, a merchant acceptance card acquiring business targeted at the informal market, which continues to be dominated by cash.
When they invested iKhokha, the pair were not yet exclusively focused on their Crossfin venture. Sparrow served as a non-executive director on the board of Business Connexion, and Gaylard was part of Capital Eye Investments, primarily responsible for its fintech portfolio.
Today, iKhokha has grown into a substantial business with over 35,000 active merchants across the country.
“iKhokha has effectively put a device into their hands [merchants in the informal sector] to enable them, [to have an] alternative way to accept cash. And as that story started building out, we landed up realising in about 2017, that we needed to bring it together and formalise it, which is what was effectively the foundation of Crossfin,” Sparrow said.
The R1.5 billion cash injection will enable the company to pursue and invest in small businesses in the payment solutions space.
Edward Pitsi, the managing partner for the Ethos Mid-Market Fund, said Crossfin is ideally positioned to continue taking advantage of the fintech industry opportunities.
“The capital will be used to acquire new business, but to also grow businesses like iKhokha; inject more capital in more businesses like retail capital, because we actually think there’s still lots of legs and lots of growth still available on the existing assets,” Pitsi said.
“We see opportunity in the sector. South Africa is still largely a cash-based market, card prevalent but is not as prevalent as it can be from an SME funding perspective. There’s still a huge funding gap; there’s a half a trillion rand funding gap in the SME space,” he said.
Sparrow said the company is targeting businesses in their early start-up phase that are complementary to Crossfin’s portfolio, such as remittance platforms.
“We will be looking at the likes of remittances across sub-Saharan Africa. There are some bolt-on acquisitions, or our existing portfolio, [in which we will be] expanding our position in funding. Some of that, geographical.”
Its presence spreads across 13 countries on the continent, including Zimbabwe, Botswana, Namibia, Lesotho, Kenya, and Ghana, among others. On an annual basis, the company processes R80 billion worth of payments through its platforms, with 90% of the payments processed out of its South African home market.