Looking to take its business off the beaten track, Central European mid-market mezzanine debt fund Syntaxis Capital in August took the bold move of expanding its operations to sub-Saharan Africa. The firm focuses on four core geographies: South Africa, Nigeria, Ghana and Côte d’Ivoire. It hopes to eventually add Kenya, Uganda and Tanzania to that list.
Adesuwa Okunbo, who co-heads the Syntaxis Africa team and is based between London and Lagos, said the firm is seeing annual demand of around $800 million for the type of funding it’s offering: an investment of between $5 million and $15 million in companies generating EBITDA of between $1 million and $5 million.
Demand is driven by a combination of factors. “The local banking system in a lot of the countries we target is not supportive of SMEs and mid-market businesses. They’re much more willing to lend to larger corporates and regional champions after the financial crisis,” Okunbo says.
“On the other hand, you have some of these countries still growing at 5 percent annually. There’s obviously a significant gap in the market where local banks are not servicing SMEs and mid-market businesses. We don’t see that changing in the foreseeable future.”
He is not alone in his assessment. Phillip Myburgh is founding partner and chief executive of South African mezzanine capital provider Ethos Mezzanine Partners. His firm is marketing its third fund, targeting $150 million with a $200 million hard-cap. Myburgh notes that term debt funding as a whole is quite difficult to arrange in much of sub-Saharan Africa.
“To raise multi-year term debt funding (even for established businesses) in some emerging markets is difficult, simply because the banking and debt capital markets aren’t that developed,” he says.“Mezzanine finance offers a funding alternative on terms that extend beyond those which a traditional senior secured lender would provide; and mezzanine instruments are considerably more flexible and capable of adaptation to suit a borrower’s specific needs.”
Okunbo adds that the private equity capital available for investing in Africa is unsuitable for the bulk of opportunities on offer. More than $3.6 billion was raised by Africa-focused private equity funds in 2015, according to PDI data; more than 85 percent of this was in just four funds.
Syntaxis’ aggregate pipeline is currently around $250 million, including potential transactions in Nigeria, South Africa, Kenya and Zambia. The firm is expecting to close its first deal – an investment in a poultry business in Nigeria – in early 2017.
“We’re quite active, and I think that’s reflective of the demand we see,” Okunbo says. “A lot of these companies really have no other option that allows them to grow whilst retaining control of their business. They don’t want to take on local bank debt that for their five-year business plan the local bank has given them a two-year amortising facility that’s priced at 30 percent in local currency.”
Okunbo is confident Syntaxis will be able to close several deals it’s working on with potential LPs and will be in a position to begin raising an Africa fund next year. The vehicle is likely to target between $125 million and $150 million.
Although the argument for mezzanine investment in Africa makes sense on paper, Scott Nelson, a private equity and corporate funds partner at Baker & McKenzie focused on Africa, warns it is not completely without challenges.
“While you should be looking at a huge number of deals, given the otherwise compelling dynamics of mezz in an African context, you probably have to rule some of those out reasonably quickly because you’re just not going to get comfortable with the legal/structural exposure.”
For LPs willing to make room for it, the strategy helps investors less comfortable investing in Africa gain exposure with less risk than with traditional private equity.
“Investors probably look at us as a safer way to capture the African opportunity,” Okunbo says. “We’re not aiming to hit four or five times on a deal, but at least if something goes wrong you definitely have a seat at the table and because of the way we structure our security, you’re in a stronger position than a private equity fund.”