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WHERE DID WE GO WRONG

June, Makena and Awino had made the decision. They were going to form an investment group. A "chama". Each one of them knew of at least one other group that had been very successful at pooling their money and investing together. The three ladies had been very close friends since high school. Makena and June had worked for the NGO for the past five years, having joined just after graduating from campus. They decided that they would invite nine other ex-school mates to join the group, which they would call the Sisters With Eternal Energy & Trust (SWEET). The main criteria for membership of the investment group were friendship, and people that enjoyed each other's company. All nine invited girls agreed to join, the first meeting was held at Antonio's Grill and the office bearers were chosen. Makena would be Chairperson, Rachel the treasurer and Njambi the Secretary. No thought had been given to what skills the members chosen would be bringing to the group. All members either worked for international NGOs, three were engineers and four worked for their family businesses. It just so happened that there were no lawyers, finance professionals or entrepreneurs in the group. Meetings would be held once a month, each member would contribute 10,000/- every month, and investments would be made in shares, treasury bills and after a couple of years when they had raised enough money from contributions – property. After every meeting, the official business was set aside and the social agenda took over. Wine, beer and bitings flowed freely, and a great time was had by all.

After a couple of years of diligent contributions amounting to KShs3,500,000, monthly meetings, investing in a booming stock market and a 2-acre property in Upper Matasia, SWEET had done incredibly well. They had an investment portfolio valued at just over 10,500,000/-. Life was good. However, during this time no audited accounts were prepared and no taxes were paid to Mr. Waweru at the Kenya Revenue Authority. One day, Mr. Waweru's boys showed up and decided assess SWEET. The group was slapped with a tax assessment and penalties of KShs3,000,000. Where was this money going to come from? No problem, they would sell the Upper Matasia plot. When a decision was made to sell the Upper Matasia plot, the lawyer handling the sale informed them that the title deed was in the name of someone else. Did you ever carry out a search on the propert? Which lawyer carried out the purchase for you and did you know them well?. Did you ever see the title deed? The answer to all three questions was no, no and no. Njambi, through her cousin's brother in law – Mbugua, had presented this once-in-a-lifetime investment opportunity, but the purchase had to be completed very quickly and he would handle everything. Njambi had failed to disclose the fact that the land was actually belonged to Mbugua's brother, a well-known conman in Ngong town. The members were devastated, fingers were pointed at Njambi and Awino and a rift began to form between these two members and the rest of the group.

But all was not lost. They still had their investment in shares. A month earlier, when the stockmarket began to perform badly, their broker at Nyege Stockbrokers continued urging them not to sell because they were getting cheaper and it was just a matter of time before the market rebounded. The value of their share portfolio had plummeted to 40% less than what they had bought the shares for, but they could still sell most of their shares to raise the KShs3,500,000 for KRA. A day after a decision had been made to sell the shares, but before the sell order had been given, a headline article appeared on the front page of Business Daily announcing that Nyege Stockbrokers had been placed under receivership.

After going through these experiences, the level of trust among the group members declined to an all tome low, attendance at meetings averaged 4 to 5 of the 12 members, and contributions had declined from 120,000/- per month to an average of 40,000/- per month.

Where had things gone so wrong?

Find out next week......

SWEET continuation

SWEET was apparently doing well as the previous articles illustrated and then all of sudden things went hay wire? Why did they go haywire? Weren’t they smarter than those of us who drink all of our savings away? A lot am sure thought to themselves and said that this was the reason that they have never and would never join an investment group was because of what happened to SWEET. You would be right in thinking as much. To illustrate what went wrong with SWEET; I shall give a short story that many of you “might have heard”.

“In the street s of Nairobi roamed a blind and deaf beggar, who would hop his way in out of streets, cross major highways without any assistance to the astonishment of all. He knew when there was oncoming traffic and when there wasn’t. It was like he could see and hear. He even walked to and fro from his home to the city. One day Mr. Ampesa was being chauffer driven in his brand new S-Class Mercedes Benz. He saw this beggar on the side of the road and saw his disabilities and was deeply saddened. He rolled up his window and with his kind and giving heart and gave the beggar a cheque of KShs 100million. The beggar was extremely grateful and praised the Lord for this blessing and rushed to the bank right away, opened a bank account and banked the cheque. He was rich now. He bought a house in up market suburb Runda, a block of apartments in Kilimani and a new S-Class Mercedes Benz. He had made it!”

Ever heard of the story? I don’t think so because I just made it up! No one can be deaf and blind and cross a road without assistance. It’s impossible! No one will ever give you KShs 100million just like that. It’s Impossible!

SWEET’s members thought that by chance without having goals and a strategic plan they would hit the big time. It’s as impossible as the blind and deaf beggar crossing a road. One will obviously trip on the pavement before they have got to the road. If SWEET was realistic, truly serious they would have had a plan to know where they were going; a plan to guide the thought process of what to invest in; a plan to succeed. Without a plan one is clearly destined for failure.

Find out next week...

SWEET Restructuring

Over the last few weeks we have been analysing what went wrong with the investment group called SWEET (Sisters with Eternal Energy and Trust). They started well but ended up going through several experiences which now threaten their continuity as an Investment Group. We saw that they based a lot of their decisions on the element of friendship and trust instead of viewing their activities as strictly business which required professionalism as well as corporate governance structures.

One of the first things SWEET should have done is to set themselves up as a limited liability company. The advantage of doing this is that their liability as individuals to any debts of the company would be limited to their capital. The second advantage is that a company can sue or be sued in its own name. The third advantage is that the individuals can sell their shares to other individuals when they want to leave the company. Now facing the wrath of Kenya Revenue Authority for tax evasion, each SWEET member was undergoing personal persecution as the properties had jointly been held in their individual names and they did not have the protection of a company to fend off the potential loss of their private properties in order to make good the amount owing to the tax man.
In the space of a few months, what had been a deep bond between friends who met regularly at Antonio’s Grill to discuss chama matters, rapidly dissolved into finger pointing, back biting and vicious wars of words and text messages. Makena, who was the Chairlady of the group, decided to call the other two original founders, Awino and June to see how they could rectify the volcanic situation. To her surprise, Awino came to the meeting accompanied by an eager faced young man who was evidently going to make a sale to them judging by the number of brochures and business cards he held in his hand. “Awino, why are you bringing third parties to this crisis meeting?” hissed Makena, visibly irritated that her friend was not taking cognizance of the situation at hand. “Makena, where are your manners? You clearly forgot what we discussed last week. This is Abu, he may have a solution for our problems,” retorted an equally irritated Awino. “Ladies, please let’s not air our dirty issues in public,” interjected June, “At this point, I am willing to listen to the Pope if he will provide even eternal salvation from this mess we are in.”

Fifteen minutes later, the three ladies were deeply engrossed in Abu’s calm analysis of their situation. He made it clear that all was not lost as their CDSC account at Nyege Stockbrokers was still intact despite being put under statutory management. All that the ladies would require is to fill out the statutory forms to move the account to a credible stockbroker and then begin the process of liquidating the shares so as to pay KRA. Furthermore, Abu advised, they could sit with the KRA auditors and provide a payment plan that demonstrated where and how they would repay the amounts owed to the taxman. “But what about the three members of our group who have flatly refused to be involved in any more chama issues, shouldn’t they be forced to sit with all of us and talk to the KRA guys?” asked June. “Not really, if you can at least sort out the movement of the CDSC account to a good stockbroker as you three are the signatories, then you can make the decisions to sell the shares and clear your names with the taxman,” was Abu’s response. Abu went on to detail how this event should help them set up the proper structures going forward for a legally incorporated company with members taking up shares in the company.

“The Swahili have a saying “kuteleza si kuanguka” and you ladies should turn this crisis into the opportunity to set up an organization that is streamlined and focused to generate future returns for its members using the collective investment energy of the group,” Abu continued. His advice made a lot of sense to the three ladies and they immediately began to visualize how they could set up a company and invite different people outside their social circles to join, each person chosen on their professional strengths. By the end of the meeting with Abu, the founder ladies were united in their resolve. They would rise up from the smouldering ashes and reorganize themselves. Next week we will see what steps they took to dust off the ashes from their wings and start to fly

 Find out next week...

When SWEET went sour

Recently, we went through the trials of an Investment Group called SWEET (Sisters With Eternal Energy and Trust). They started well but ended up going through several experiences which now threaten their continuity as an Investment Group.  Indeed specific things went wrong but focusing on only this would be like curing symptoms without analysing the disease.

The main problem with SWEET is that the fundamental objective of the group had not been agreed upon.

One of the most crucial things that a Group needs to deliberate on from the very beginning is whether the main objective will be Social or Business. Many people looking at this statement right now are probably saying – of course my chama has a Business Agenda. We meet, contribute money and have investments.

We are going to be the next big thing, the next TransCentury. These intentions are extremely honourable but SWEET also had the same intentions. They all knew of Groups that had been very successful, they contributed and they invested. They obviously had a business objective or did they? Let us look at the story a bit more closely and rethink the Business versus Social Dilemma.

“The main criterion of the Group was friendship”. For an Investment Group certain skills are important (in fact crucial) to have such as legal, finance, investment, business etc. The initial membership may be made up of friends and we do recognise Investment Groups are usually formed by people who know each other largely from social networks.

It is however important to either seek out additional members who have these skills and more importantly are willing and available to use these skills for the Group, or make a conscious decision to use professionals who can provide regular advise in these areas. So it is not the fact that they were friends that made them a social group but that they limited their abilities and hence the potential to create wealth to the immediate circle of friends.

Lack of professionals also saw the Group’s transactions being handled on the basis of trust. Due diligence was not conducted on the investment opportunities or the people handling transactions.  They did not engage professionals such as lawyers and financial advisors. 

We saw SWEET buying a property only to find out years later that they held no title deed.  We saw them using brokers who went under receivership. We also saw their ignorance on keeping financial records as well as how to make decisions on their investments such as when to sell.

How could this have been avoided?  Apart from the professionals, maybe the start is as simple as prioritising the business and not the social agenda during meetings. The agenda as well as the venue as much as possible should reflect the business objectives of the Group. There is a reason East African Breweries does not have its board meetings at kengeles. After a couple of beers, it is probably hard to remember that you never did a search on the property you are buying and easy to believe the stock market will keep going up indefinitely or members relatives must be trustworthy.

It is also hard to invite professionals such as lawyers and accountants to your meetings when the driving force behind coming together is to have a jolly good time! In summary the second thing that makes SWEET a Social Group is how they handled their business affairs.

Friendship is never the problem and in fact with the right structures in place, is able to accelerate the business agenda. We are also not propagating that the social fabric of the chama is ignored. However, if the fundamental objective of the Group is business related, certain structures do need to be put in place to avoid the mistakes that we saw with SWEET and ensure that the business objective of the Group remains priority and is achieved. If this common scenario is anything to go by ‘business gone bad’ can adversely affect friendship.

In many ways SWEET put the horse before the cart. What are some of the things they should have done to achieve their business objectives from the very beginning even before investing.

Find out next week.

Dos and Don'ts

Abu’s advice was followed to the letter. After ten excruciating months of moving their CDSC account from Nyege Stockbrokers to Tabiabora Stockbrokers, and negotiating a payment plan with KRA, the three SWEET members finally liquidated the group’s shares and paid off whatever was due to the taxman.

Despite all the hell they had gone through, two of the SWEET members were still convinced that an attempt should be made to revive SWEET, reconvene all the members and start afresh. They had all gone through a very steep and very painful learning curve.

“Come on guys”, implored Makena. “We’ve got to give it another shot.” Yes, we have failed, but I really believe that there is value in failing. Failures are lessons, and what you can draw out of each failure is experience and knowledge that will help you succeed better. If you’ve never failed, you’ve never lived.” “Okay, stop looking so shocked - not my own words I admit, but it’s something I heard from a motivational speaker a few years ago, that has stuck with me ever since.”

“Sorry, I’m out”, said June throwing up her arms. “This entire nightmare has left me emotionally drained and devoid of any will whatsoever to have anything to do with investment groups or chamas ever again.” “I’ve lost money, I’ve lost friends, and I just don’t have the strength to start all over again.” Despite all attempts by Awino and Makena, June had checked out and there was no amount of convincing would change her mind.

“Before we call the others with our proposal to revive SWEET, Awino, let’s understand, from all our experiences, the Do’s and Don’ts,” said Makena:

DO:

-          Keep the main agenda of investment group meetings strictly to business. Any social agenda can be dealt with after the official business meeting is complete.

-          Use credible professionals to handle your transactions – from accounts to legal matters.

-          Comply with all government statutory and regulatory requirements – auditing accounts every year, paying all taxes due.

-          Proper research and due diligence before making any decision to invest.

-          Keep proper records of all your internal and external correspondence, financial and legal transactions.

-          Set up appropriate (governance) structures to conduct the affairs of the group.

DO NOT:

-          Get tempted by “once-in-a-lifetime” investment opportunities.

-          Fail to disclose to other group members, family and related parties that are involved with or a part of the investment transaction.

-          Depend solely on the advise of someone who is going to benefit from an investment transaction you make, e.g. a stockbroker.

-          Let friendship prevent you from having difficult discussions with fellow group members –but think before you speak.

-          Give any of your fellow members any reason whatsoever to mistrust you. Once the trust is no more, the group is no more.

When the first meeting in just over a year was convened, 5 of the 12 members had opted to sell their shares in SWEET and leave the group. They were willing to take whatever loss in their overall investment would be incurred. As a private company, pre-emptive rights applied to any sale of shares by shareholders, and the 7 remaining shareholders were offered the shares on sale in proportion to their current shareholding. The shares were valued according to the net asset value per share. Only Awino and Makena agreed to buy the shares of the exiting members. One of the major decisions made by the members who agreed to stay on was that it was no longer necessary for all members to own exactly the same amount of shareholding as each other. Since inception they had always agreed to maintain a culture of “equity” at all times, regarding shareholding and decision-making. However, the new and improved SWEET had decided to adopt a new, bolder, more progressive approach to investing, where every member would be encouraged to invest as much as they could in SWEET, and to use SWEET as their primary investment vehicle.

Other “bold” decisions had been made at this first meeting. “After all we’ve been through, why don’t we transform SWEET into a serious investment company? If we’re contributing money to this company, why can’t we run this company just as seriously as the companies we all work for are run?” asked Njambi. Eyeing her quizzically, Rachel responded, “But we’re just a chama……, chamas aren’t “serious” businesses! “Why not?” asked Njambi. “Well, because, because……” Rachel didn’t have an answer to this simple question. By the end of their meeting, the group had resolved to discuss, at the next meeting, how they could transform SWEET into a serious investment company. In particular, the members wanted to understand what they needed to do to restructure SWEET into this “serious” company, and how they could develop a clear plan to transform SWEET into a wildly successful investment company.

 

Origins Investment Group Advisors

info@originsiga.com

Commitment and Equality

Investment groups are great investment vehicles. They provide financial freedom in ways you cannot imagine. However there is one common error that has caused investment groups’ death, that is the misconception that equality of contributions equals equality of commitment.

Today I am going to disprove this notion. If Jane Doe earns KShs 200,000 every month and John Dee earns KShs 20,000 and they invest KShs 10,000 every month into their chama , who has more commitment? The correct answer is John. He gives 50% of his monthly income as his contribution while Jane give 5% of hers.  You see the reason you cannot measure commitment with equivalent cash contributions is because Kenya is not a communist state so the harsh reality is; there is someone who earns more than you do and less than you do. This therefore implies that all if a fixed amount is seen as the solution you will not have equal commitment because some will be contributing more than they are willing to lose and others what they consider a night out on the town.

Commitment should be measured in terms of percentages. A minimum amount should obviously be set but a percentage of one’s income say 15% should be the prescription for this commitment dilemma. Remember if one is contributing what they cannot afford to lose then they will take the investment group seriously.

The other fear shareholders have is that one person will control the group if they are allowed to contribute more than the minimum. This again is a misconception. If a group of 20 members  has 8 people who contribute KShs 10,000, 5 contribute KShs 15,000, 5 contribute KShs 20,000, 2 contribute KShs 50,000 the smallest shareholders who contributed KShs 10,000 would have a 3% shareholding while those who contributed KShs 50,000 would have 14%. A 14% shareholder cannot control the company but a 51% shareholder can. The latter is very unlikely to happen investment group. So the real question is; does one want to be a 10% shareholder of KShs 10,000,000 portfolio or a 1% shareholder of KShs 500,000,000 portfolio?

The most important reason that equality of contributions is a death sentence for an investment group is that, it limits the company’s ability to raise capital. Capital is as important to the investment group as oxygen is to the human being. If Jane of above can contribute KShs 50,000 monthly the investment group has KShs 40,000 extra in capital monthly, therefore can do a bigger deal or more deals which in turn makes the portfolio larger which allows for more leveraging that will give higher return on equity and make more money for the investors. To sum it all up, a big fat cheque for everyone.

Mali Rasili Testimonial

Before Origins,

  • Mali Rasili Group was a social group more than the business group it was intended to be.
  • Members were not punctual.
  • Meetings were monthly
  • Meetings were held in social setting such as restaurants.
  • Meeting took 2-4hrs long.
  • All the administration work was left to office bearers who had full time jobs elsewhere.

After outsourcing Origins IGA,

  • The frequency of meetings has gone down to quarterly but productivity at the meetings has gone up.
  • Meetings take 1 and half hours shorter than before and members of the meeting are punctual.
  • Origins also provides access to meeting rooms and therefore meeting at social places stopped and now we meet in a proper board room.
  • Having accomplished advisors constantly looking after your investments has also given members peace of mind and confidence in the investment group which is their preferred retirement vehicle.
  • This is our retirement vehicle and Origins IGA is incubating Mali Rasili for a more prosperous tomorrow.

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