Private equity firm MFS Capital Partners still has a few regulatory hurdles to clear before completing its first business acquisition since it underwent a name change from SSLVC last August, but CEO Dino Hinds expects to wrap up that process by January 2024.
The company has been going after connected company, Micro Financing Solutions Limited, also called MFS Ltd, and last November signed an agreement to acquire 100 per cent of the shareholding in the business that has been operating in the microlending and cambio markets since 2014, before expanding into other financial activities such as remittance services.
But MFS Ltd has restructured its operation since then.
In an interview with the Financial Gleaner on Monday, Hinds said MFS Ltd has revised its business model and stripped itself of the microfinancing service. Instead, it has shifted to private credit, alongside its long-standing foreign currency exchange or cambio service, bill payments and remittance services.
The restructuring of MFS Ltd came amid actions by the Bank of Jamaica to license microcredit institutions and bring them under the regulatory supervision of the central bank; but parts of the legislation was said to be “onerous” and “extensive” assessments that would require much paperwork and operational changes for particularly small-scale lenders that were operating in the industry.
The terms microcredit, microfinance and microloans are used interchangeably.
“MFS Ltd no longer offers microloans, but it has gone into the business of private credit. The company offered microloans before the passing of the Micro Credit Act, but in the due diligence to prepare for the passing of the act, we looked at the micro credit space, assessed the risks and made a decision that private credit is less risky,” Hinds said.
MFS Capital and MFS Ltd are related by common shareholders and directors.
Still, the deal is expected to be accretive to the private equity firm and will allow the company to earn in its core business capacity for the first time. Currently, MFS Capital’s revenue inflows come from new business lines – receivables financing and consultation services – but the intake from those services is booked as non-core income.
During the year ended June 2023, MFS Capital earned revenue of $16.3 million from receivables financing and another $6 million from consulting fees. Overall, the company recorded $30 million in other income, which contributed to profit of $8.74 million, despite no core revenue. In the year prior, the company booked a larger profit of $18 million but that outturn emanated mainly from one-off items flowing from MFS’s takeover of the shell of SSL Venture Capital Jamaica Limited, now renamed as MFS Capital.
“There are many different aspects to deal with in executing an acquisition but because MFS Ltd is a regulated company, we have to ensure that we complete the acquisition in a way that is in compliance with the legislation. That’s the most sensitive aspect of completing an acquisition,” said Hinds.
“But if there were 10 steps to complete this acquisition, we think we’ve covered 9.5 of those steps, so in short order that deal should be completed,” he said.
MFS Ltd operates two branches, both of which are based in Kingston, but expects to add a third branch, also in Kingston, by first quarter 2024.
Its plan is to grow the firm to 12 branches nationwide and expand the suite of MFS product offerings.
“Aside from MFS Ltd, we have acquisition opportunities in the pipeline and we are in the due diligence process now. If we get to the MOU stage then we will make an announcement,” Hinds said.
He added that MFS Capital will soon have to decide on how to finance its future capital projects, but will allow investors time to examine its balance sheet following the acquisition of MFS Ltd before settling on the funding route.
As of now, MFS Capital remains in the red, with an accumulated deficit of $138.7 million. Its current liabilities exceeded its current assets by $41.7 million. However, its owners expect a healthier company to emerge once the MFS Ltd acquisition is finalised.