In a discussion led by Alec Hogg, GG Alcock and Warren Wheatley addressed South Africa’s economic transformation, comparing it to historical periods of rapid wealth creation. They highlighted the burgeoning entrepreneurial spirit within townships, the shift towards digital transactions, and the resilience of informal economies. Challenges such as limited access to capital and formal financial markets were noted, alongside the potential for innovative solutions and structured investments to stimulate growth. The discussion emphasised the untapped potential of informal businesses and the need for supportive infrastructure and financial inclusion to drive substantial economic change.
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Summary of the Q&A session with GG Alcock & Warren Wheatley at BNC London
In a Q&A session, Alec Hogg, GG Alcock, and Warren Wheatley discussed South Africa’s economic landscape, comparing it to historical periods of rapid growth and wealth creation in other countries. Alcock emphasised the emerging entrepreneurial spirit in South Africa, with people moving from formal jobs to starting small businesses. He shared a story of a librarian who used his pension to start a successful bakery. The discussion highlighted the challenges and opportunities in the informal economy, including the lack of access to capital and financial support. Alcock noted the resilience and adaptability of informal businesses, especially during challenges like COVID-19 and load shedding. Wheatley elaborated on Altvest’s approach to supporting small businesses through portfolio-based investments, ensuring risk is managed while enabling significant capital deployment. They also addressed the growth of digital payment systems in townships, which facilitate financial inclusion and provide a record for extending credit. Both emphasised the importance of financial infrastructure and education in sustaining economic growth. The session underscored the potential for transformative growth in South Africa’s informal economy if provided with appropriate financial tools and support, despite the existing barriers and challenges.
Edited transcript of the Q&A session with GG Alcock & Warren Wheatley at BNC London
Alec Hogg [00:00:07] Thank you, guys. That was really interesting. It reminded me of what you were saying earlier. It must be from faithfulness. When you go back to South Africa today, it’s like Sweden was 30 years ago. It’s incredible. If you look at it moment by moment, it’s hard to see. But if you go back and look at history, the United States from 1880 to 1922 was an incredible period. I think they called it the Gilded Age, the time when more millionaires and billionaires were created. Do you think that’s possible in South Africa? Do you think we’ve got a momentum that’s growing? As you said, the unemployment rate is not 33% as the official stats say, but more like 12%. You don’t see soup kitchens, long queues, and violence erupting as you would at a 32% unemployment rate. Maybe you can talk about that. Are you seeing this creation of wealth transforming into something bigger?
GG Alcock [00:01:16] So the first thing is, incomes are being developed at a level we can’t imagine. There’s been a fundamental shift over time towards people increasingly wanting to be part of a hustle, to have their own business. For example, there’s a baker we work with, part of Supreme’s loyalty program for township bakers. He was a librarian at Unisa University, took his pension, and started this bakery. He bakes 600 loaves of bread a day, along with rolls and cakes. He put his wife into a new bakery he set up, taking more money out of his pension fund. He’s doing better from the bakery than he did as a librarian. Many people in this economy have left formal businesses, benefiting from their training and experience, and moved into the informal economy. The problem is they have to pull from their pension fund. In Africa, we see businesses start small and stay small. This is a fundamental issue stopping us from having a Gilded Age level shift. If we can liberate support, grants, funding, and loan abilities to businesses, it would be transformative. We’re on the cusp of this sector growing if people pay attention.
Warren Wheatley [00:03:54] It’s more than just solving unemployment and income. It’s the ancillary work needed for wealth creation, like financial advice, reinvesting profits, and ensuring capital flow. This is what we focus on, creating capital circularity, providing heritage building, wealth planning, and financial management. It’s a regime change that’s needed, not just access to loans and financial services. These are the areas we work in.
Alec Hogg [00:04:59] Maybe thought change as well, because we’re a highly politicized country. We’ve got an election coming up in two weeks, and a Socialist party is likely to get the most votes. Will that ever change? The Americans unlocked human potential with their founding fathers, but our founding fathers are holding back human potential. What might be the catalyst there?
GG Alcock [00:05:30] The mistake is assuming people follow what politicians say. In reality, people in these spaces are entrepreneurial and capitalist. Even during apartheid, people opened illegal shebeens, spaza shops, and the taxi industry emerged from nothing. The vast proportion of people I speak to know the government won’t help. Load shedding has negatively impacted the informal sector more than the formal sector. People have become resilient and independent, which will be the saving grace. They are not reliant on the government, and there’s no BEE in this sector. People just carry on and do their thing. This emerging resilience and independence are accelerated by Covid, as people realize they need to make it on their own.
Alec Hogg [00:07:03] How effective was social distancing in the townships during Covid?
GG Alcock [00:07:07] There’s a report by UCT Liberty Institute called “Thriving, Not Striving,” showing the black middle class’s resilience during Covid. 80% of the black middle class were not affected as much as the white middle class. Informal economy businesses in residential areas continued operating, often with creative solutions like keeping back doors open for customers. The resilience and ability to make alternative plans, like waking up at 3 a.m. during load shedding, showcase their entrepreneurial spirit. They can withstand shocks better.
Warren Wheatley [00:09:19] That was such a long answer, I forgot the question.
Alec Hogg [00:09:24] Let me ask you, Warren, if you could invest in township businesses. The returns are extraordinary. You were talking to Sean earlier. Could you repeat that story and see if Warren would be interested in investing in that kind of return on investment?
GG Alcock [00:09:45] Sean was talking about the return on investment. For example, if you build a set of three back rooms, it costs between 30,000 to 80,000 rand. You can rent them out for 3,000 rand each, making 9,000 rand a month. The return on capital is pretty good.
Alec Hogg [00:10:45] So your PE in insurance terms is under one, less than one. Would you invest in something like that, Warren?
Warren Wheatley [00:10:54] Those are small-scale investments. For asset managers in London, it’s impractical unless you solve the infrastructure around giving large amounts of capital. We’ve addressed that with a portfolio approach, creating a unit trust of township businesses to avoid single asset exposure. These large portfolios can accept large amounts of capital for deployment to entrepreneurs. We’re not asking pension funds to invest in individual small businesses but in portfolios with different themes. This way, we can invite institutional participation from worldwide investors.
Alec Hogg [00:12:37] Muhammad Yunus started with Grameen Bank, offering very small loans successfully because people repaid them. What is your experience?
Warren Wheatley [00:12:52] We’ve had almost zero defaults in six months. We don’t offer unsecured lending. Personal security creates the right credit behavior. This responsibility is evident in other characteristics we look at in our credit assessment. Our lending approach is different; we ask what happens if we don’t give them the money. This change in perspective helps us be impactful and improve the country.
Alec Hogg [00:15:20] What about taxes? If you’re extending money and taking a risk, you need formalized financial statements, suggesting taxes would be paid. How do you approach that?
GG Alcock [00:15:43] There’s been an incredible shift towards card acceptance. Recently, about 40% of all transactions in townships are card transactions. Companies like Yoco and Capitec extend working capital loans based on card transactions, taking a small percentage of each transaction as repayment. This financial record allows businesses to access working capital, moving away from cash. People aren’t in cash to escape taxes; they lack alternatives. We’re seeing a dramatic shift towards digitization in this space.
Alec Hogg [00:19:58] You mentioned Lusaka. We’ve had good recommendations in the business portfolio, and it’s up 30% in six months. That’s your way into the informal market?
GG Alcock [00:20:18] Absolutely.
Alec Hogg [00:20:20] A question from Justin: What about manufacturing and value-added production sectors in the informal economy?
Warren Wheatley [00:20:44] We’re able and willing to provide loans to manufacturing, but most SMEs don’t approach us due to the high infrastructure investment required. Most informal businesses are capital-light. We hope this will change as capital becomes available. Currently, investments are limited to small-scale equipment for maintenance or repair work.
GG Alcock [00:22:26] Livestock is production. For example, South Africa imports £500 million worth of goats annually, and the informal sector produces most of this. Small-scale construction and manufacturing are present, like mattress manufacturing and aluminium windows. These businesses face challenges in financing, which limits their scale.
Alec Hogg [00:25:00] The opportunities are vast. Last question from JD: Banking the informal economy and a cashless society—what’s the opportunity for a Monzo/Venmo-type offering?
GG Alcock [00:25:37] Mobile money transfer is huge in South Africa, but transactional mobile banking like M-Pesa in East Africa is not as widespread. A new product called Pay Shop allows instant phone-to-phone payments using phone numbers as proxies. This will likely dominate along with cards, reducing cash reliance. Cash is inefficient and risky, and as alternatives become available, we’ll see a dramatic shift away from it.
Read also:
BNC London: Middleton Q&A – Strategies and insights for SA’s energy future
BNC London: GG Alcock – The hidden wealth of SA’s informal economy
BNC London: Warren Wheatley – Revolutionising finance for SA’s informal and SME sectors
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