ROWAN DE KLERK: It is not unpatriotic to invest abroad

As we exit the 2024 national election season there is a lot of uncertainty for business owners whose assets are tied up in SA. They want to know what the operating environment will look like considering that SA is forecast to experience less than 1% growth per year in the coming years.   

What is the outlook for the currency against the the euro and dollar? Will investors be able to hedge against rand movements? Will we see another decade of low economic growth limiting people’s ability to build their businesses as a source of wealth?

These kinds of questions have been front of mind for many entrepreneurs over the past few years and raise an interesting question: is it unpatriotic to take your money out of the country?

When it comes to investment portfolios, offshore investing has materially outperformed the JSE over the past 10 to 15 years and this has had a real effect on the ability of South Africans to retire or achieve financial independence.

While many people have been comfortable with the idea of taking money offshore via their share portfolios, many still seem to be reluctant to expand their businesses outside the country.

Stigma

Perhaps there is a stigma attached to joining the waves of skilled South Africans who have departed for places such as Australia, the UK and the US. Those who have the means to leave the country are often perceived to be less patriotic or less interested in using their skills and wealth to develop SA.

I don’t believe this should factor into your decision when considering expanding your business offshore. Many entrepreneurs I have met are deeply passionate about SA and building a better future. But the reality is we are part of the global economy and we need to do what is practical for our businesses and take advantage of market opportunities in other geographies.

We have a client who was importing a significant amount of stock from Europe to supply the SA market. Later they made a strategic decision to buy into the supply chain in Europe to control quality and improve margin. Over time they started to offer product to the European market. These operations in Europe soon expanded and now account for 70% of the gross revenue of the group. The founder and CEO still lives in SA. 

This is an entrepreneur who has it right: live in — and enjoy the benefits of — SA but derive hard currency cash flow and profits from abroad.

The following should be considered when looking to take your business offshore:  

• Do your homework. Entrepreneurs may be opportunistic when making decisions without fully researching the markets they plan to enter. SA entrepreneurs wishing to expand into the US is a good example. Many people misunderstand the culture shift when moving into the US market and assume that size and relative economic prosperity will make it an easy win. Without an excellent understanding of the market, the competition and different cultural perspectives the US is a tough market to crack.
• Many businesses get funding wrong. Often they dip into operating cash flows from their SA businesses to kick-start their offshore operations, rather than building up reserves or investing fresh capital. Consider the rand/pound exchange rate. When I started my business it was R10 to £1 — now it is R23 to £1. It highlights why you want to hedge against rand weakness in the long run, but it may weigh on operating cash flows from the core business.
• There is nothing wrong with going asset light. While it is great to have a London or European address on your letterhead, do not overcommit. Rather start out with a smaller presence, familiarise yourself with the market and then build on this.
• An element that often surprises entrepreneurs when they move into international markets is the difference in terms of the cost of human capital skills relative to SA. Establishing the equivalent of an SA team in a developed market could cost you four or five times more. When you are earning rand but paying out in dollars, euros or pounds this can have a material impact on cash flow.
• If you are working in an intellectual property (IP) rich business — such as in the technology sector — it is not simply a case of exiting your SA market and establishing yourself offshore. Building, transferring and protecting your IP in a chosen jurisdiction is a complex matter that will require specialist input to help you navigate the legal, tax, forex and Reserve Bank implications.   

As entrepreneurs we all want to build thriving businesses in SA, but we also have to be realistic about the opportunities that exist here versus beyond our borders. Whether there is an opportunity to enter developed markets such as the US, Europe, UK, intra-African trade or trade with India and China, we can’t ignore the potential. 

It is not unpatriotic to invest capital offshore. Rather, it should be a key consideration for derisking your business, but only if it is done right. 

• De Klerk is CEO at The CFO Centre.