Ethos Private Equity and Patrice Motsepe’s black empowerment investment vehicle, African Rainbow Capital (ARC), have teamed up in a R1.5bn buyout of SA fintech platform Crossfin.
The transaction is one of the largest private equity-led investments in the fintech sector in SA and will provide Crossfin, an investor in payment technology companies and small business funding providers, with the necessary capital to grow its underlying portfolio. The deal will also involve the exit of Crossfin’s founding investors Capital Eye Investments and the Multiply Group, which have been anchor shareholders in the group since 2017.
“Crossfin is ideally positioned to continue capturing the payments technology and the broader fintech opportunity both existing and emerging,” said Edward Pitsi, the deal lead and managing partner in the Ethos mid-market fund 1. “The transaction is an exceptional opportunity to acquire a group with significant value creation momentum.”
The R1.5bn acquisition will involve a consortium of investors led by Ethos’s mid-market fund 1, along with the founding Crossfin executive management team; the Ethos artificial intelligence (AI) fund 1; and African Rainbow Capital. Fairview Partners, an independent investment banking firm, helped structure the deal.
The deal will see ARC Financial Services, which is 50.1% owned by African Rainbow Capital and 49.9% by the ARC Fund, acquire 37.33% of Crossfin for R600m. The Ethos mid-market fund 1 and its co-investors, will acquire about 35.57% for an undisclosed sum, with the remaining amount held by the Ethos artificial intelligence (AI) fund 1 and Crossfin management.
That will leave Crossfin 72.9% black-owned as both ARC Financial Services and the Ethos mid-market fund 1 and its co-investors are considered black-owned vehicles in terms of SA's empowerment legislation.
While the buyout comes at a time when private equity outfits are on the hunt for well-priced deals after many businesses were left in a cash-stressed state after months of hard lockdown in 2020, Crossfin says its underlying investments have benefited from the post-pandemic shift to online transacting. The company processes about R80bn in payment transactions a year through its underlying portfolio companies.
“Over the last 18 months as we've traded through the pandemic, we've been very fortunate that our business across the board has enjoyed an accelerated growth,” said Dean Sparrow, CEO of Crossfin. “We have a very robust and cash-generative business underpinned by strong annuity revenue streams across our portfolio.”
Sparrow said Crossfin’s main reason for the transaction was to access growth and acquisition capital. One such bolt-on acquisition that the investment holding company is considering is opportunities in the remittance and cross-border cash transfer space.
“We’ve got a number of ideas on our radar,” said Sparrow. “That would very much be across Sub-Saharan Africa. The Crossfin business is very much anchored in SA but we do currently operate in 13 different African countries.”
Crossfin invests in businesses with complementary attributes and high-growth potential across three main pillars: payment technologies; smart funding; and venture capital. The group’s main payment technology investment is Adumo, an omnichannel payment business that processes about 200-million payment transactions a year across about 50,000 merchants through its various payment platforms. The payment technology segment includes Adumo subsidiary iKhokha, which operates in the informal economy where most payments are still cash based, and Crossgate Holdings.
Retail Capital is Crossfin’s main smart funding business, which uses transactional data to provide funding to small and medium-sized businesses. The smallest of its three investment pillars is the venture capital arm, Crossfin Ventures, which though accounting for less than 5% of the group’s estimated value, is seen as a useful vehicle for gaining early-stage exposure to emerging fintech companies.
Crossfin is also acquiring Sybrin, a low code and AI enabled enterprise software business targeting the financial sector, with a focus on automation and the use of AI and machine learning to achieve efficiencies for its clients. The transaction includes the acquisition of the current business as well as the provision of growth capital.
“ARC is excited about its investment into Crossfin, which represents a further deepening of its own fintech ambitions, which is to establish an ecosystem of relevant fintech-type business,” said Charmaine Padayachy, ARC’s deal executive on the transaction. “Crossfin has a capable management team in place that we are confident will continue to add significant value to what is already an impressive track record, underpinned by quality and high-growth businesses.”
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