Activism investment as the key to unlocking value in regional firms | September 2015

Activism investment as the

key to unlocking value in
regional firms
Management Consulting
September 2015

kpmg.com/eastafrica/mc

Introduction
An activist investor is an individual or group that purchases a
significant portion of a companys shares and tries to obtain seats
on the companys board with the goal of effecting or enabling a
major transformation in the company. A company can become a
target for activist investors if it is mismanaged, has excessive
costs, can be run more profitably or has another problem that the
activist investor believes can be fixed to make the company
more valuable.
Fuelled by performance pressures and a growing expectation of
low, inadequate and increasingly questionable returns from
traditional investment avenues, investors are increasingly seeking
higher returns and diversification by allocating a growing portion
of their investment funds to less liquid but more promising
alternatives through venture capital firms, private equity and
hedge funds.
The challenge in assessing the attractiveness of asset classes
targeted by such activist investors lies in the inadequacy of
financial statements to capture all elements affecting their value
since business models can be disrupted, inventories can grow
obsolete and receivables uncollectible; liabilities are sometimes
unrecorded and property values over or understated.
Growth companies on the other hand have multiple opportunities
to expand their business models into other rapid-growth
markets. However, most of the companies under this category
have not been able to realise their full potential owing to
inadequate capital, inconsistent performance, lack of properly
established structures and lack of a clearly defined growth
strategy that would-be investors find essential in assessing a
companys overall investment attractiveness.
Apart from a companys future prospects, other factors
considered by these investors might include; return on assets,
liquidity, leverage ratio, annual sales growth rate, dividend yields,
price-to-book values and price-to-earnings ratios. These provide a
tried and tested approach to identifying attractive companies in
high growth industries with sustainable competitive advantages.
However, unquoted companies that cannot observe the above
financial ratios due to lack of adequate capital structures might not
attract as many investors and thus continue to register sub-optimal
returns.

The challenge
lies in the
inadequacy of
financial
statements to
capture all
elements
affecting the
value of a
business...

Activism investment as the key to unlocking value in regional firms | September 2015

The challenge therefore lies in establishing a clear analysis and

evaluation framework that enables investors minimise their
investment risk whilst also enabling growth companies adopt
leading operating practices that attract investment and unlock
untapped shareholder value.
Accordingly, investors are adopting a more hands-on approach to
investment to enable high potential businesses in their portfolios
unlock value and realise higher returns. For instance in January
2013, the Nairobi Securities Exchange (NSE), Kenya championed
for the formation of the Growth Enterprise Market Segment
(GEMS), which enables growth companies to raise capital to drive
their growth plans while benefiting from increased profile and
liquidity within a regulatory environment designed to meet their
needs. The GEMS segment of the NSE makes it affordable for
SMEs to gain access to financial resources previously the
reserve of larger companies, while giving investors the assurance
of the safety of both principal and interest due to increased
oversight on the operations of their portfolio companies.
However, the lack of a dynamic framework for comprehensively
evaluating emerging business models has kept firms in high
growth industries such as technology away from the GEMS of
the Nairobi Securities Exchange. Almost three years later, only
four (4) companies have subscribed to the GEMS. These account
for a paltry 6% of the total listed companies on the bourse.
Meanwhile, investors recognise the untapped value of unquoted
growth companies globally. However, striking the delicate
balance between constructively supporting a company unlock its
hidden value whilst also maintaining a focus on the core function
of effectively sourcing and allocating capital in addition to
avoiding a costly asset-management operation, remains a
challenge. What tools can these investors and businesses
owners use to collaborate more effectively?
Part of the solution lies in the application of the various options
available to both business owners and investors to create better
channels of collaboration and communication to ensure
consistent revenue growth. By analysing emerging trends in
global and regional investment markets, it is possible to prescribe
a set of interconnected levers of strategic and operational value.

What tools can

management teams
and investors use to
collaborate more
effectively?

Activism investment as the key to unlocking value in regional firms | September 2015

These levers of value as detailed below, form a prescription for

business owners to apply strategic and operational best practice
to enable them fine-tune performance, identify potential
innovation, and cost saving avenues. This in turn, can increase
their chances of attracting funding to scale operations and
explore untapped markets. It is a prescription for seeking out
undervalued companies with a value-creating program in place
to enable the partial or full realisation of the underlying value.
Additionally, it provides activist investors with a framework for
developing value creation programs that also includes a
monitoring and evaluation model spanning key business
functions.
These levers therefore allow for the careful and in-depth
consideration of emerging business models and complements
various financial analyses, including free cash flow. Free cash
flow is the cash generated annually from the operations of a
business after all capital expenditures are made and changes in
working capital are considered. Investors have increasingly
turned to this metric because reported earnings can be an
accounting fiction, masking the cash generated by a business or
implying positive cash generation when there is none. Following
the cash as the manager of a business must dois one of the
most reliable and revealing means of assessing a company.
However, this is not a prescription for revolving-door capitalists,
but for investors with a longer-term objective, prudent enough to
identify untapped value yet patient enough to commit over the
long term. Such investors are not driven by quick fixes, such as
cost cutting or debt-funded share buybacks; tricks employed to
create short-term value at the expense of long-term value, rather
they seek sustainable, outsized returns.
Collectively, business model evaluation based on the four
strategic levers of value and financial analysis provides a
repeatable model for business owners to maximise the value of
their firms and for activist investors to limit their risk exposure
and maximise their return on investment on an investment-byinvestment basis.

However, this is
not a prescription
for revolving-door
capitalists...

Four strategic levers of value

Businesses require a bespoke strategy to raise capital in order to
strategically expand operations and improve efficiencies.
Research and experience suggest four strategic levers that are
driving success in growth companies. These levers provide a
framework for companies to redefine value for customers
innovating in their respective markets. Secondly, they serve as a
guide to building powerful, cohesive business systems that will
deliver more value than competitors will. Finally, they provide a
roadmap for raising customers expectations beyond the
competitions reach.
Market leaders of the past decade have cemented their
dominance by focusing on delivering value for their customers in
line with three principles and perfecting them beyond the reach
of their competitors. They include focusing on operational
excellence, product and service innovation and customer
intimacy. The levers discussed here are therefore a prescription
for applying the above principles using four emerging strategic
levers of value - value chain and operational efficiency,
automation, crowdfunding and data analytics.
The levers are by no means comprehensive. For one, they do
not touch on talent and people management, which is just as
important in emerging markets as in developed ones; indeed,
people are a companys most valuable assets and these levers
of value exist to help employees achieve excellence in their dayto-day operations. In a preferred way, attention is drawn to areas
where transformational growth has been witnessed because of
their successful implementation.

1.

Value chain and operational efficiency

In an ever volatile and disruptive business environment where

companies face competition from traditional and non-traditional
players, activist investors need a well-defined and agile
framework for assessing an organisations value chain and
operational efficiency.
Increasingly, management teams face three key challenges
around value chains and operational management. These include
cost containment, increasing operations visibility and risk
management. Depending on how a management team
approaches the coordination of these three factors, they can
either have a positive or negative impact on a companys bottomline results.

The strategic
levers
of value
include; value
chain and
operational
efficiency,
automation,
crowdfunding
and data
analytics.

Activism investment as the key to unlocking value in regional firms | September 2015

Accordingly, the activist investor has to ensure that management

teams are focusing on both short-term and long-term value chain
cost containment strategies to complement enterprise growth
and product/service innovation strategies and activities.
With increasing globalisation, management teams are
increasingly forced to adopt a granular view to operations
coordination. This is because even minor missteps and
miscalculations can have major consequences as their impacts
spread rapidly throughout complex, costly and increasingly
vulnerable value chain networks, thereby eroding margins and
impacting negatively on shareholder value.
By consistently out-operating competitors, companies can
achieve sustainable growth and establish a leading position in
their industries. Operational efficiency allows for cost savings
that can be passed on to customers by offering services and
products at a discount compared to competitors. It is therefore
the imperative of a companys management and shareholders to
agree on best value chain and operations methodologies to
apply based on the companys objectives. These should be
complemented by a dynamic monitoring and evaluation schedule
of the tools and processes that are in place to ensure growth
and innovation goals are attained. This approach, accompanied
by technology, can be used to inject efficiencies in high growth
industries such as energy, media, healthcare, service industries,
education and even agriculture.
In Kenya for instance, flower farms are adopting lean six sigma
process-based improvements to benchmark and enhance their
production and distribution processes against global best
practices. This has led to the increase in the vase life of flowers
exported to European markets due to better storage and faster
delivery of flowers. There has also been a notable decrease in
the number of required workers per farm with most farms
registering an average of 40% decrease in the number of
required farm labourers. Process-based mobility has also
enabled farmers monitor the temperature in their greenhouses
using mobile-enabled sensors, greatly enhancing the quality of
grown flowers. These incremental gains have enhanced
profitability of the farms while also enabling Kenya to solidify its
position as one of the leading global producers of flower
products.

Investors
must ensure that
businesses have
frameworks in
place to address
challenges around
cost containment,
increasing operations
visibility and risk
management.

Activism investment as the key to unlocking value in regional firms | September 2015

Choosing where to focus

The key to successfully improving value chains and operations performance is to focus on those
areas that are not only under-performing but also, those that are aligned with the overall product
and service innovation strategy. The challenge lies in having a cost-effective operation but not
necessarily competing on cost. By instituting innovation and mapping constant value chain
performance gap analysis programs, activist investors and management teams can use their
findings to compare these key performance indicators with competitors and achieve this
objective.
Secondly, by mapping out value chains on mobility applications accessible via hand-held devices
such as tablets and mobile phones, management teams all over the world now have digital
assistants that enables them to monitor production process and identify bottlenecks in real time.
Activist investors can therefore benefit greatly from enhanced visibility by coming up with an
internal and industry monitoring standard in collaboration with management teams. Such
frameworks allow for seamless scalability of process excellence across similar portfolio
companies and greatly enhance the performance of an investors portfolio.
The monitoring and evaluation standard should have key performance indicators which addresses
the current performance and future desired performance of elements such as product selection,
forecasting and procurement, warehousing, inventory management and distribution based on
quality, response time, costs and productivity.
Such a dynamic system provides an objective assessment of the performance of the business
relative to industry and provides both the management teams and investors with the agility and
transparency that they need in order focus on their core business of managing and allocating
capital respectively, without leading to unnecessary conflicts of interest due to the overlap of
functions.
Illustration 1
Graphical representation of a key performance indicator of value chain efficiency

Activism investment as the key to unlocking value in regional firms | September 2015

2.

Automation of processes and functions

Investors need to be on the lookout for high growth companies

that are automating others or instituting automation internally.
Automation of processes and systems leads to innovation and
costs savings by improving efficiency and promoting connectivity,
which in turns deepens the activist investors understanding of
events and sharpens decision-making.
The proliferation of smarter end-points, scalable computing,
mobility and visualization are reshaping the future of industrial
and service automation. Around the world, forward-thinking
investors are insisting on the adoption of leading-edge automation
technologies and practices by their portfolio companies. This is
because automation enables company to deliver superior
customer value in line with operational excellence, customer
intimacy, or product leadership.
By strategically formulating growth strategies around taking
advantage of emerging opportunities in high growth industries,
activist investors can evaluate a companys automation index and
potential, including the attendant cost-saving and scaling avenues
and make appropriate investments that will catapult it to higher
levels of profitability.
For instance, the falling price and rising reliability of sensor
technologies means that practically any process can now be
measured. The convergence of physical and digital infrastructure
means production tools and solutions can communicate and
collaborate directly, without human intervention. Entire systems
including supply chains, transportation systems and electric
power grids can be connected.
This trend explains the success of Amazon, the worlds largest
retail chain. By automating its logistics process and the repetitive
tasks in its marketing and sales processes, Amazon has
established its dominance by providing superior customer service
compared to its competitors. Amazon has demonstrated that
automation efforts are most effective when a business
deliberately links its automation strategy to specific measurable
objectives. By automating nurturing functions through a series of
emails, video, surveys or mailing customers a box of cookies
from a fulfilment centre (distribution warehouses) Amazon aims
to get the prospect to call, schedule an appointment or buy
something. This strategy explains its success with the millions of
customers who flock its website daily.

Investors
need to be on the
lookout for high
growth companies
that are automating
others or instituting
automation internally.

Activism investment as the key to unlocking value in regional firms | September 2015

Therefore, every insight derived from an automated and interconnected manufacturing operation
can lead to action and more value, including increased visibility for investors removed from the
day-to-day operations. In addition, sensors, RFID tags, meters, actuators, GPS and other devices
and systems will increasingly generate information that was previously created by people.
Management teams do not have to rely on labour-based tracking and monitoring for objects like
shipping containers, trucks, products and other parts. This reduces variability and uncertainty in
value chains and presents an exciting opportunity for investors seeking long-term stability. By
seeking out businesses in high growth industries with a high automation potential, activist
investors can collaborate with management teams to automate the operations, catalyse product
innovation and improve the customer experience and by so doing unlock sustainable value.

Activism investment as the key to unlocking value in regional firms | September 2015

3.

10

Crowdfunding

Crowdfunding is the practice of funding a project or venture by

raising monetary contributions from a large number of people
though an electronic platform e.g. the internet or mobile
applications. Three types of actors anchor the crowdfunding
business model: the project initiator who proposes the idea or
project to be funded; individuals or groups who support the idea;
and a moderating organization that brings the parties together to
launch the idea. Crowdfunding can be either reward-based,
equity-based or debt-based. The popularity of crowdfunding has
grown at a phenomenal rate in the last few years and is now an
industry that is worth in excess of $5 billion worldwide.
Crowdfunding is traditionally used to validate emerging business
models that are considered too risky by traditional financiers such
as banks and private equity firms. By allowing entrepreneurs to
raise capital from a group of smaller investors in a secure and
automated platform, crowdfunding democratizes fundraising and
allows people outside the traditional investor groups and lenders
to join in on the process. Increasingly, it is also being used to
finance proven business models in high growth industries, albeit
at a lower scale.
Equity crowdfunding platforms are also gaining traction as a
gateway to viable investment opportunities. New equity
crowdfunding platforms are providing a gateway to alternative
investments that have historically been difficult to source and
almost impossible to access. Until recently, investors needed to
meet relatively large investment minimums and an existing
relationship or personal connection to an investment manager in
order to invest directly in high growth investments apart from
start-ups.
Many well-established private companies and attractive funds can
be launched on these crowdfunding platforms, which will greatly
benefit both the end investor and the issuers seeking nontraditional sources of funding.
For instance, through the online investment platform
RealtyShares, crowdfunding is disrupting the traditional private
real estate funding model by providing accredited investors
access to real estate investment opportunities in the United
States of America. Investors can browse opportunities by asset
type (i.e. single family home or apartment building) or geography
and can pool their money with other investors to purchase shares
in these opportunities for as little as $5,000 (Ksh.500,000).
Investors also have access to an investor dashboard where they
can monitor their investments, returns and tax documents.

Crowdfunding
is traditionally used
to validate emerging
business models that
are considered too
risky by traditional
financiers such as
banks and private
equity firms.

Activism investment as the key to unlocking value in regional firms | September 2015

11

MicroVentures, on the hand allows investors to contribute as low

as $3,000 (Ksh.300,000) and invest alongside more established
venture capital investors. To date, MicroVentures has raised over
$20 million, spread among over 45 companies implementing newage business models including Twitter, Facebook, and Yelp. Thus,
through crowdfunding, RealtyShares and other crowdfunding
platforms make investing in real estate and other high growth
sectors transparent as investing in stocks of publicly traded
companies.
Crowdfunding platforms like RealtyShares, Indiegogo, Kiva and
KickStarter will not only provide a level of access and
transparency that has never before been possible for high growth
industries in emerging economies in Africa, but also greatly
reduce the time and capital requirements needed to invest.
However, a more activist approach, from both investors and the
investment platform coordinators will be necessary to improve
both fundraising and operational outcomes for businesses
seeking investment.
In South Africa for instance, crowdfunding platform Thundafund
not only provides a fundraising platform, but also works closely
with entrepreneurs pre-and-post fundraising to enable them get
the best out of their ventures. This is because in most cases,
business owners with potentially disruptive business models lack
the skills and resources to enable their ventures achieve
sustainable profitability. Hence, an activist investor of modest
means making a bet on a potentially disruptive business model
through crowdfunding requires a more stringent due diligence
framework.
In this connection, Thundafunds projects acceptance rate
currently stands at over 10% with only 160 of the 1400 projects
submitted for consideration made accessible to investors after a
collaborative screening process with the Thundafund team where
the financial viability of the submitted ventures is tested.
Additionally, this activist approach enables management teams
access a new breed of investors. For example, Thundafund has
been able to raise funds from a new group of investors through
targeting the unbanked and unconnected populous in rural areas
in South Africa. Accordingly, it has reached its funding target for
various projects by holding talks in local churches and libraries
with prospective investors who account for over a third of its
investors profile.

To date,
MicroVentures has
raised over $20
million, spread
among over
45 companies
implementing newage business models
including Twitter,
Facebook, and Yelp.

Activism investment as the key to unlocking value in regional firms | September 2015

12

For the aspiring activist investor, the crowdfunding business

model presents an exciting opportunity for scale. Applied
judiciously, it is a lucrative platform to diversify capital through
early stage investments in ventures with high growth prospects
e.g. in consumer products. Together with the other levers of
value, it can enable investors to pool resources and consequently
realise outsized returns when the venture achieves a sufficient
maturity level to warrant an exit either by acquisition by a larger
company or listing in the capital markets.
In East Africa, crowdfunding is an emerging concept in need of a
few success stories to be fully effective. The successful
implementation of the crowdfunding concept will require the
collaboration of platform sponsors/owners with business owners
to create an analysis framework that allows for comprehensive
due diligence on a business-by-business basis, in line with an
industrys peculiarities. This will promote the understanding of
emerging business models in high growth industries and enhance
the mass mobilisation of funds from non-traditional investors who
are more risk averse.
Secondly, it will require targeted awareness creation through
various channels, depending on the target group. Generation,
education, wealth levels, ethnicity and any other relevant criteria
can be used to segment these prospective investors. The
marketing medium used to promote the investment opportunity
has to be sensitive to the target group e.g. social media and other
online platforms for the youth and middle class, and in-person
discussions with investors organised around savings groups.
Finally, a very definitive performance management framework is
required to ensure that the stakeholders definition of value is
uniform and measurable. A balanced scorecard touching on the
other three levers of value that are defining the success of market
leaders globally is a good starting point. This will greatly enhance
assessments based on capital performance and give a more
comprehensive picture of an investment opportunity or portfolio
company.

For the aspiring
activist investor,
the crowdfunding
business model
presents an exciting
opportunity for scale.

Activism investment as the key to unlocking value in regional firms | September 2015

Illustration 2
Business models adopted by major crowdfunding firms globally

13

Activism investment as the key to unlocking value in regional firms | September 2015

4.

14

Data analytics

Data analytics can be an effective communication tool for

management teams and prospective investors by allowing for
increased collaboration as each group taps into the vast amounts
of data available for analysis. For management teams in data-rich
industries, the insights gleaned from the vast amounts of
available data allows a more complete picture of customers
preferences and demands. Through this deeper understanding,
organizations of all types are finding new ways to engage with
existing and potential customers.
In addition to customer-centric objectives, other functional
objectives that management teams are addressing through the
application of data analytics include operational optimization, risk
management, financial management, employee collaboration and
enabling new business models. According to research by MIT,
companies that inject data analytics into their operations show
productivity rates and profitability that are 5% to 6% higher than
those of their peers are. This statistic presents an interesting
opportunity for an activist investor encumbered with an
underperforming portfolio company in a high growth, data-rich
industry such as fast moving consumer goods (FMCGs),
technology, telecommunications, media, healthcare, energy and
finance.
In a report published by KPMG (See Data and Analytics: A new
driver of performance and valuation, July 2015), twenty-four
percent of the respondents said they changed one or more of
their investment opinions based on a companys data and
analytics strategy, and 45% expect that to be the case in the next
two years. The report indicates that data and analytics strategies
are affecting organizations across industries. Hence, failing to
have a data and analytics strategy, or executing one poorly, can
negatively affect a companys ability to compete -- and therefore
its value.
In particular, investors view companies more favourably if they
use data analytics to achieve any of three specific objectives
improving operating performance by controlling costs, shrinking
inventory, and allocating resources optimally; developing new
business models and information-based products and services; or
limiting supply chain risk based on mining data from transactions
with partners, suppliers, and vendors.
In order to increase operational efficiency and achieve significant
and measurable business value, activist investors can encourage
management teams to put into place an information foundation
that is integrated, scalable, extensible, secure and supports the
rapidly growing volume, variety and velocity of data.

In a report
published by KPMG,
twenty-four percent
of the respondents
said they changed
one or more of
their investment
opinions based on a
companys data and
analytics strategy,
and 45% expect that
to be the case in the
next two years.

Activism investment as the key to unlocking value in regional firms | September 2015

15

Investors can promote for the integration of information systems in companies with disparate data
storage structures. The silo effect, where information from different departments cannot be used
by managers to drive key decisions effectively, has the effect of obscuring key value-adding
avenues that exist across many businesses. Therefore, integrated information is a core component
of any analytics effort. Moreover, an organisations data bank also has to be uniform, readily
available and accessible to the people and systems that need it.
In this connection, activist investors can improve the overall performance of their portfolio
companies by continuously reviewing operations to ensure that their management teams have
the capability to build advanced analytics models for predicting and optimizing outcomes. They can
achieve this by ensuring that a clear strategy on how to use the data and analytics to compete is
in place and that the right technology architecture and capabilities are deployed. The cumulative
gains realised because of a companys insight-based operations are manifested through better
decisions and more agile and profitable operations.
The democratisation and availability of information because of increased mobility can also
empower activist investors to benchmark a companys internal data against external data sources
from its competition, suppliers, customers, and regulatory bodies.
For example, global retailer Wal-Mart has been able to realise a 10% to 15% online customers
completion rate by deploying Polaris, its inbuilt search engine that relies on text analysis, machine
learning and even synonym mining to produce relevant search results.
Other companies are also using data analytics to inform their pricing strategies. Most businesses
make reactive changes based on fluctuations in commodity prices, competitors price shifts, or
pressure applied by their distribution partners. This approach inevitably leads to a chaotic pricing
framework and underperformance across many businesses with wide product portfolios. By
adopting integrated price management systems, such departments can realise increased sales by
collaboratively setting prices to avoid cannibalisation within the portfolio.
In conclusion, management teams need three key elements of data analytics to enhance the
value of their organisation: the technology, the ability to execute, and a culture that embraces
data-driven decision-making. Any prudent activist investor should therefore look out for this
winning formula before making any investment.

Conclusion
The four levers of value as discussed above provide long-term
oriented activist investors with a framework for identifying and
closing significant performance gaps in companies in emerging
and high growth industries. By benchmarking on value chains
and operational efficiency, activist investors can initiate
constructive dialogue with management on a value creation
agenda focused on improving and monitoring operational
efficiency.
Automation and data analytics on the other hand provide both
management teams and investors with an efficient avenue for
real time data collection and analysis, leading to the
establishment of a positive momentum for the long-term
improvement of corporate strategy and operations.
Finally, crowdfunding also presents good news for the emerging
activist investor: a large capital base is no longer a prerequisite for
unlocking value in businesses. Furthermore, the transparent
performance assessment capabilities that crowdfunding
platforms possess make it easier, now more than ever, for the
activist investor to identify disciplined management teams with
rational portfolios and strategies and invest in them appropriately.
About Bill Allela
Bill Allela is a Strategy and Operations
consultant in KPMG Advisorys
Management Consulting practice in
Nairobi, Kenya. Bill is a CFA candidate
and has extensive experience in
entrepreneurship and research having
worked with Fin-tech start-ups and an
industrial research organisation.