Fintech, AI and growth: Romeo Kumalo’s African investment thesis

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JEREMY MAGGS: You’ll know that one of South Africa’s biggest fintech stories of the year is Optasia’s blockbuster debut on the JSE (Johannesburg Stock Exchange), raising something in the region of R6.5 billion, but also sending a strong signal that local capital markets still have global pulling power. Among the early backers cashing in is LLH Capital, co-founded by broadcaster-turned-investor Romeo Kumalo.

The listing marks the largest fintech IPO (Initial Public Offering) in years, and has revived confidence, I think, in the JSE’s ability to attract high-growth tech players.

Read:
Optasia debuts on the JSE
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Romeo Kumalo and Gil Oved cash in on Optasia IPO

So what does this deal then tell us about South Africa’s investment climate? And I wonder what Romeo Kumalo’s next bet is? Well, Romeo a very warm welcome to you. First of all, let’s just talk about the success of the listing. What does it tell us, in your opinion, about the state and maybe even the future of South Africa’s capital markets?

ROMEO KUMALO: Well, I think there’s confidence in South Africa’s capital markets. Optasia was oversubscribed, and it also says a lot about South Africa’s fintech market and also the confidence that investors have in the fintech industry in South Africa and across the African continent.

JEREMY MAGGS: Why do you think that confidence prevails right now? There is concern that maybe that bubble is about to burst. Where’s your head in that space?

ROMEO KUMALO: Well, we don’t think so, Jeremy. If you look at the African continent and if you look at the increase in smartphone penetration, if you look at what’s happening with digitisation and internet connectivity, we think there’s huge opportunity for growth on the African continent.

If you look at the opportunity that AI presents in terms of the different industries and services, we think that it’s going to help many of the founder-led innovative businesses to leapfrog in many services.

If you look at our model around the convergence of telecommunications and financial services, we think there’s a lot of opportunities for growth and that’s why investors have just gone confidently into stocks like Optasia.

Read: SA banks step up Africa drive amid fintech rivalry

JEREMY MAGGS: So how does the continent then capitalise on the appetite and the potential that you are outlining to me?

ROMEO KUMALO: Well, we are raising this big fund to back founder-led businesses, and we think that there are a lot of Optasias that are waiting to be discovered and scaled.

Our model is to find AI, digital-led businesses that are innovating.

There are a lot of young – not even young – a lot of businesses out there that need capital, that need operational expertise, that need strategic leadership, access to networks, access to capital. We are there to find those businesses and help them to scale.

JEREMY MAGGS: What kind of criteria would you then apply to your model going forward, given that it is risky and there is also a lot of chaff in amongst the wheat?

ROMEO KUMALO: Well, we generally look for businesses that are solving real problems. Many, many of these founder-led businesses have got founders who are solving real problems, tech that is solving real problems in the market. There are many businesses that we’ve invested in, businesses like Ozow, businesses like … Flow Living and Bottles. We’ve seen the model that’s worked in Optasia. So those are the kinds of businesses that we’re looking for.

Read: R5.2bn payday for early investors in Optasia

JEREMY MAGGS: How do you assess risk, though, when investing in founder-led businesses such as the ones that you’re chasing versus those maybe with a little bit more weight with institutional governance structures?

ROMEO KUMALO: Look, it takes a long time to invest, and we have a risk model that we use to ensure that these businesses can sustain funding and make sure that we can get the kind of risk-adjusted return on investment on our capital. There’s a long way to ensure that we can work with these founder-led businesses.

It takes a while. You need to make sure that you’re working with businesses that have tech that is investable, and people who have done it before. So yeah, it’s not easy. We’ve done it before, and we need to make sure that the tech is sustainable.

JEREMY MAGGS: As far as Optasia is concerned, why was now the right moment for LLH to realise part of its stake? Was it about timing, market conditions, or is it simply a strategic rotation play?

ROMEO KUMALO: Very strategic for us. We had been with Optasia for almost ten years now. We’ve sold down a significant portion of our investment. We’ve kept a bit of equity, but we think there are other opportunities in the market to look at.

Listen: Optasia is officially trading on the JSE

So it was a strategic alignment for our portfolio and we think there are other AI-driven ventures that we can look at at this point in time.

JEREMY MAGGS: Take me back to the beginning, Romeo. What was the original investment thesis behind backing Optasia?

ROMEO KUMALO: (Chuckle) We met the founder in 2016, I remember – 16 August 2016. At the time, I was looking now, Jeremy, at the investment thesis that we had at the time of the convergence of telecoms and financial services, and I remember chatting to Bassim (Haidar), the founder, around his tech of solving real problems and around financial inclusivity.

We flew to London and flew to Athens, met the team, looked at the tech, and we thought, there’s something here special around making sure that we can include a lot of Africans around financial services and inclusivity.

Read: AI fintech Optasia eyes Asian expansion

The tech was robust, and we thought there was something really special around here in terms of introducing this amazing tech to the likes of Vodacom and others, but also just amazingly, the way he had assembled an amazing team around him.

JEREMY MAGGS: Are there key lessons from the Optasia journey then, Romeo – whether it be in growth, whether it be in governance or timing even – that are going to inform your next deal then?

ROMEO KUMALO: Oh yes. If you look at the journey around operational expertise, if you look at the journey around the tech, if you look at the journey around governance, if you look at the journey around the collaborative investors that we brought on board, there are many, many lessons that we can take from this amazing investment in Optasia to take on to the rest of the other ventures that we’re looking at.

Read: FirstRand takes stake in Jordaan-backed fintech Optasia

It’s been an amazing journey with this team, and we will continue to work with the Optasia team as well, to take some of the insights and the learnings to the next ones.

JEREMY MAGGS: Other ventures that you’re looking at, so where do you see the next strategic opening for African capital in the next cycle?

ROMEO KUMALO: Many others in financial services and telecoms. We really think that this space of growth around African digitisation and we think that the increase in smartphone penetration and AI is what’s going to drive growth in Africa. A lot of the ventures that we are looking to back are businesses that are changing people’s lives, but they are also innovating around digitisation and around financial inclusivity.

JEREMY MAGGS: How do you tell African naysayers, though, that there is opportunity on the continent? Is that a difficult discussion to have?

ROMEO KUMALO: We engage with investors in the US. In recent times, I was in Silicon Valley talking to investors around AI. I spent a week there meeting different entrepreneurs and investors, and of course, they have a different view around the continent. In fact, they know nothing about what’s happening on the African continent.

So when you start talking to them about the digital dividend and the opportunities that Africa presents, they start looking at it from a different perspective.

So yeah, it is very, very hard, particularly when you talk about risk on the African continent. What they see and what they read about Africa is just risk and wars. So it is hard when you start talking to investors about the opportunities in Africa.

But we believe in the continent, and we believe that this continent has many, many opportunities, particularly around financial services and telecoms. What AI presents now is an opportunity to leapfrog in many of these sectors.

JEREMY MAGGS: Romeo Kumalo, thank you very much indeed.

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