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A Case Study – Matlapeng Housing Group

Private Equity partnering with government in developing small businesses

Matlapeng Group (“Matlapeng” or the “Group”) is a leading integrated property group with a proud track record of large-scale turnkey residential construction developments to both blue chip mining houses and the low to mid income market.

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Key facts since Investment

Company: Matlapeng Housing
Investor: Musa Kubu Fund
Country: South Africa
Sector: Housing Construction
Stage and category of investment: Growth and expansion capital
Amount invested: R47.7m in 2009
Equity value: R191.8m as at 28 Feb 2014
Unrealised IRR: 32.1%
Employees: c.1,200 as of 28 Feb 2014
Revenue: R251.1m as of 28 Feb 2014
EBITDA growth: 39.2% – 5 year CAGR to 28 Feb 2014

ESG Impact:

  • SMME on-the-job and classroom training;
  • Procurement support and SMME input funding; and
  • Access to market through business formalisation and marketing training.

ESG Interventions:

  • Matlapeng has partnered with the Department of Trade and Industry (“DTI”) to develop its subcontractor supplier base. This includes small businesses who provide electrical, plumbing, tiling and bricklaying.

Total employees trained in 2014: 378 with approximately 1,000 employees over a 3 year period.

Overview

The Group is developing a vertical value chain which comprises:

  • Matlapeng Housing – a leader in low cost housing construction to the mining and residential sectors;
  • Lakutshona Property Solutions – a rental stock portfolio management company with c.1,350 houses under rental stock management; and
  • Double Glazed Windows Manufacturing – Matlapeng is backward integrating into double glazed windows manufacturing and distribution with production expected to commence 2015.

Matlapeng Housing Company (“Matlapeng”) has partnered with the Department of Trade and Industry (“DTI”) in the development and ongoing management of a 3 year Incubator Support Program (“ISP” or “Program”) aimed at the development of Matlapeng’s sub-contractor supplier SMME’s. The ISP focuses on high impact initiatives such as training, procurement support and access to market through business formalisation initiatives (for example company and tax registrations as well as BBBEE accreditation).

Investment Impact Highlights

Musa Kubu Fund acquired a 55% equity stake in Matlapeng In 2009, through an equity injection and a mezzanine funded growth facility. Through active involvement in the strategic planning and operational oversight, the company has achieved:

  • Significant job creation – Since investment by the Fund, the business has expanded its employment base from 150 in 2009 to in excess of 1,200 currently. The business is currently expanding nationally and expects to create a further c.2,500 jobs in the North-West Province, Limpopo, Northern and Western Cape. Employees receive training and development as part of the Groups employee training program;
  • SMME development program – Matlapeng has partnered with the DTI to provide a 3 year extensive training program aimed at creating sustainable and independent SMME’s in their supply chain;
  • Critical skills development focus – Matlapeng provides an extensive training curriculum aimed at up skilling and developing their employee and SMME supply base. The program focuses on practical and classroom training and is rooted in the belief that a skilled and empowered SMME supplier base is a critical responsibility of shareholders and greatly beneficial to all stakeholders;
  • Provided housing solutions to the South African mining industry – Matlapeng has developed housing solutions for blue chip mining houses in the Northern Cape. In the next phase of growth, the Company will deliver mine housing solutions in the troubled Platinum Belt and Limpopo. In the process the Company will grow its rental stock portfolio by providing external investors an opportunity to invest into its high rental yield portfolio; and
  • National expansion of proven business – Matlapeng has a robust pipeline of lucrative projects in the North-West Province, Limpopo and Western Cape. Matlapeng has developed c.2,750 houses for the low to mid income market with a conservative pipeline of 6,000 to 10,000 houses over the next 5 years.

Private Equity Firm’s Approach to ESG Issues

Musa Capital aims to generate attractive risk-adjusted returns through investing in companies that add significant value in terms of social and sustainable economic development of the base of the pyramid/previously disadvantaged consumers and communities.

The Company as an Investment Opportunity

  • Matlapeng Group has experienced significant growth over the past 5 years with a revenue and EBITDA compound annual growth rate of 19.2% and 39.2% respectively.
  • The business has developed a culture of excellence and constant operational improvement which has culminated in improved gross and EBITDA margins over the period. In FY14, management conducted an opex efficiency initiative which resulted in only a 4.6% opex increase on the back of 25.8% revenue growth.
  • The Group has a proud track record in housing construction and has developed in excess of 2,750 houses to date with an anticipated 6,000 – 10,000 unit pipeline over the next 5 years.

Relevance of ESG Issues to Investment

With the recent instability in the South African mining sector, Matlapeng is seeking to replicate their strong success in the Northern Cape to resolve workforce issues in the troubled Platinum belt. Provision of housing in these troubled areas has proven to have a considerable social, developmental and community uplifment impact. With unemployment and skills development at the top of the national agenda, this model is widely regarded as the only true long term sustainable solution to mining workforce stability.

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Outcomes

SMME Development Program: Job Creation and Skills Development

Through the ISP there is currently an employee base of 378 employees in Kathu that are benefiting from this skills development program. The cumulative benefit over the 3 year program is expected to reach 1,000 employees. This development is focused on training that incorporates a unique blend of both practical on-the-job and classroom training for maximum benefit to the enrolees. Matlapeng has taken a considerable hands on role in interfacing with the sub-contractors on project sites to ensure that a detailed needs analysis has been carried out. This is being undertaken through one-on-one meetings with designated management, and through the establishment of a board comprising of senior management as well as external advisors to structure a program that meets and exceeds these individual’s needs. The focus is on creating capable, educated and marketable employees of the future that can enhance the construction sector community in South Africa.

Sustainable SMMEs

In the first quarter of the ISP, Matlapeng has enrolled 8 SMMEs (employee impact of 378), identified as the initial beneficiaries of the program. The key focus was to address each individual SMMEs skills needs from a human capital perspective and to understand how the program can help enhance the businesses sustainability beyond the program period. The aim of the program has targeted key business development areas such as business formalisation, procurement, and SMME input funding. It is anticipated as the program continues to expand, more SMMEs will be positively impacted. SMMEs of the future with these core elements can only help in improving the country’s skill deficit, and it is through such DTI partnered initiatives, with wholly committed private partners such as Matlapeng and Musa that such an impact is possible.

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