Due diligence on third-party payment processor deal

Private equity (PE) financing is crucial to the development of emerging markets. In addition to capital, PE investors provide technical and managerial expertise and industry connections to the companies they invest in.

However, making sound investments that contribute to economic development depends on quality information. Genesis helped fill an information gap for an international private equity firm.

We conducted a commercial due diligence assessment of a third-party payment processor (TPPP) in South Africa whose main business was processing insurance-premium payments. The PE firm required information of the TPPP’s potential revenue growth and the likelihood of influencing the management team on possible changes in strategy before investing.

This investment decision hinged on the fact that South Africa was moving towards a new regulatory environment for debit-order collections (Debicheck) – the TPPP’s main line of business. This new system had the potential to negatively affect the TPPP if it was not ready to implement the required changes.

Genesis first conducted interviews with the management team of the TPPP to measure the level of influence the potential investors would have on introducing value-added services, such as a credit scoring service for other FSPs.

Genesis then measured the impact that the regulatory changes would have on the TPPP’s revenue using a scenario-based financial model. The inputs to the model included projected economic growth levels, customer retention and propensity of payment methods (based on historical company figures and industry averages), and different method of collection (EFT, early debit order, and the new Debicheck method). The model identified a 75% possibility of revenue increasing, despite the introduction of Debicheck and the potential for customer losses.

The favourable financial outcomes of the model were an indication that the PE firm should make an investment, but with caution since the management dynamics of the TPPP suggest that the private equity team would face difficulties when proposing new ideas. Based on this information, the private equity firm took proportional ownership in the TPPP, and the financial model provided both sets of stakeholders with a tool for assessing revenue growth on an ongoing basis.

After the transaction took place, Genesis also supported the private equity firm in understanding how the TPPP’s revenue could realistically be diversified. This was achieved by assessing the models of successful insurance service providers internationally, and considering which models the TPPP would most likely be able to replicate in a South African context.