While African tech companies are attracting considerable investor interest, South Africa-based private equity firm Secha Capital invests in what it calls “boring” sectors. The firm – which targets small- and medium-sized enterprises (SMEs) in Southern Africa – has investments in food, hair and footwear businesses. Betsy Henderson speaks with managing director Brendan Mullen about the firm’s investment thesis and opportunities in the region.
Secha Capital has invested in consumer goods and agribusiness companies; why these sectors and what other opportunities do you see in Southern Africa?
We started with fast-moving consumer goods (FMCG) and agribusiness for our first fund, mainly because they were industries we were familiar with from our earlier consulting careers at Bain. We like to watch what works in other markets and then see how it applies in the South African context. For example, one of the companies in our portfolio, Native Child, which manufactures plant-based haircare products, is the equivalent of Carol’s Daughter in the US. It’s the same thing with the meat snacks trend; in the US, companies like Krave and Epic are equivalent to the biltong (dried, cured meat) industry here, which led us to invest in the biltong company Stoffelberg.
Overall, we see the most opportunities in the sectors of FMCG, agribusiness, healthcare, manufacturing, energy and business-enabling services. We also see localisation as an important global trend; we look for sectors where South Africa can leverage local resources to provide import substitution. For instance, there used to be a lot of footwear and textile manufacturing in South Africa and as tariffs increased elsewhere and China became a less secure production source, we saw a massive opportunity to grow existing companies here. Offering a locally designed shoe allows us to charge a higher price and expand our profit margins.
In terms of opportunities specifically in South Africa, the country has much to offer. There is a lot of cheap land – relatively speaking – and an abundance of sunlight that makes solar energy a strong opportunity. We are currently considering investments in energy storage that would complement existing developments in this space. Many components of energy storage and battery supply chains already exist. Whereas more traditional private equity investors might seek out large energy companies, we are more interested in opportunities to locally produce the components for those solar energy systems.
Secha Capital has previously noted it invests in “boring” sectors and not in technology companies. Explain this investment thesis.
We describe boring sectors as areas where there is demonstrated local demand but limited focus from traditional investors. I mean, you don’t see much private equity investment in wig and hair companies like the ones in our portfolio, even though wigs are an R8 billion (about $509.8 million) market in South Africa alone. These sectors often produce goods that everyday consumers rely on, which is why the companies in our portfolio range from hair products and shoes to nutritional supplements and biltong.
We’ve found investing in these boring sectors offers an opportunity for both superior financial returns and job creation. Through our ‘find, fund, and support’ model, over the past four years we’ve proven we can take SMEs from R1 million (about $63,729) in revenue to R30 million (about $1.9 million) and create 25 jobs along the way. At that point, they often reach a growth stage where larger strategics and private equity funds become interested in investing.
We say we don’t invest in technology because we are interested in sectors that have a solid, basic consumer portfolio. These industries can become tech-enabled to increase efficiency, but they are not considered tech companies. Everyone wants to start a fund and invest in tech, crypto or AI – which all are important – but you generally need massive returns and there are a lot of people already in that space. As a smaller fund, we feel we can offer more value by building up existing local businesses with growth capital and operational support.
Secha Capital has investments in three hair-focused companies. What led you to invest in this sector?
We realised multinational companies were not able to respond to the market as quickly as local SMEs. You also have an increasingly conscious consumer base that wants to put a face to the companies from whom they buy products. Haircare is a personal care sector that is important for both women and men. As a result, it’s a big market and you will succeed if you can provide the customer with a superior product that they can trust.
One of the hair companies in our portfolio, Wukina, was created for this very reason. The company identified structural inefficiencies in the hair market, where importers and wholesalers make most of the profit and little is left for other players. Wukina calls itself “South Africa’s first hair network marketing company” or “Africa’s Avon for hair”. The company’s goal is to empower women to cut out the middleman in wigs, weaves, hair extensions and earn a commission selling hair to family, friends and other customers.
You’ve mentioned that companies in the missing middle often offer great investment opportunities in Africa. What does this mean?
To us, the missing middle means companies that are established and therefore too big to be called start-ups, but at the same time too small to garner interest from traditional private equity. These companies generally have good product-market fit and positive gross margins but struggle to access growth capital and may be too small to have strong balance sheets and access to cheap debt. Usually, they’re at an inflection point for scale yet cannot bring in the talent necessary to help them take that next step. That is where we come in to provide the necessary growth capital and operational expertise to help them scale.
How do you source your investments?
We look at sectors first, run the numbers, learn the price points and see what trends are here to stay; then we create a summary of what the ideal company should look like and investigate whether it actually exists. In other words, most of our deals are outbound rather than inbound.
For example, we met with eight biltong companies before we found and invested in Stoffelberg and we met with four different natural hair companies before we found Wukina and later, Hair City. It took probably a year and a half to find those last two; we had a one-page investment piece which we sent around to everybody we knew in the industry and somebody finally passed us along to the folks behind Wukina. We’ve done this several times now and it can take a while, but so far, we’ve been happy with the results.
We’ve also found that being hands-on with our companies helps us gain insight into these industries and make further connections that lead to other investments. We often hear investors saying pipeline is an issue. But it’s only an issue if you are competing on the same five or six large deals with everyone else. Because we write much smaller cheques and work with local companies who are still at an early growth stage, we don’t face as much competition.
Describe some of the investment lessons you have learnt over the years.
We feel cognitive diversity is a tool that is often missing from the investment world. At Secha Capital, our team is relatively young and over 50% female, and over 80% of the companies in our portfolio have a female founder. As a company, we look for new perspectives to help identify local investment opportunities that other traditional investors may overlook. As an example, we found our first hair company because our co-founder, Nombuso, had used the product. We believe the more women and the more diversity in private equity, the greater the impact and the better the returns.
Our ability to make connections and create ideas comes from getting our hands dirty helping our companies grow, rather than building Excel models and designing slides. Some of our best ideas have come from working with one portfolio company and, in the process, finding solutions beneficial to our other companies or led us to discover opportunities in related sectors.
Lastly, it’s a small thing, but we’ve noticed SMEs sometimes pivot or rethink strategic plans and key initiatives too often. One lesson we’ve learnt is that sometimes the smartest thing to do is to set a plan and ruthlessly execute it for six to nine months before changing course or undergoing a major review.