The lack of access to bank capital for many businesses throughout Africa is due to factors including the region’s higher-risk profile and lack of long-term debt products from banks, outside of South Africa. This gap creates a plethora of opportunities for the private sector and is what attracts many of the foreign credit investors operating in the region.
“Some funds focus less on maximising returns, and more on the social impact of boosting access to credit in under-served markets,” says Andrew Apampa, a research officer for the African Private Equity and Venture Capital Association (AVCA).
AVCA recently released a report showing that the private credit market in Africa grew from less than $50 billion in 2000 to more than $650 billion currently. The report also predicts the market will continue to grow and will reach more than $1 trillion in assets under management by 2020.
Enitan Obasanjo-Adeleye, head of credit research at the AVCA, says the organisation began to notice that many of the equity sponsors it tracks were beginning to raise funds dedicated to credit, which illustrated a seismic shift in the credit lending industry.
AVCA found that only 8 percent of private market funds raised in the region between 2012 and 2017 were dedicated to private credit. However, many firms lend out of their equity funds to the strategy, while some are starting to raise dedicated credit funds, and new players continue to enter the market.
Birth of mezzanine
Vantage Capital is one firm looking to close the funding gap. The South African-based firm started as a private equity shop in 2001 and then launched the first mezzanine fund in South Africa in 2006 after realising the gap in the market, says Luc Albinski, managing partner and one of the founders of the mezzanine unit.
Albinski says Vantage originally began lending mainly to businesses within South Africa, but as the market became saturated, it began to branch out into other countries and expand the percentage of the fund deployed abroad. Vantage currently lends to 12 different markets all over the continent, including Ghana, Namibia and Uganda.
Vantage’s mezzanine strategy targets companies with at least $2.5 million in EBITDA. The firm invests across multiple industries including healthcare, real estate and energy.
London-based TLG Capital was established in 2010, after its founders also noticed opportunities in the financing shortage for the African mid-market. Founder and principal of the firm, Zain Latif, says that TLG Capital hopes to help minimise that gap. “I see more funding opportunities now than I did 10 years ago, as the banking sector woes continue in the region,” Latif says.
TLG Capital invests across countries and industry sectors and has made investments in retail businesses in Rwanda; a healthcare business in Liberia; and fintech companies such as MyBucks, which helped open the first bank in a Malawian refugee camp.
The firm focuses on debt investments with equity kickers to get a higher return on investment, Latif says. It also requests quarterly distributions to keep tighter control of investments in riskier markets.
“We look at opportunities where we will be able to come in as a debt investor, provide hard currency facilities, and structure them more like flexible financing,” he says.
Richard Palmer, head of corporate debt at CDC Group, a London-based public liability company that looks to invest in companies that help lift people out of poverty, echoes that statement.
“You need to be flexible [when] investing in Africa,” Palmer says. “Africa needs bespoke financing solutions because every country and every financing situation is different.”
Palmer adds that CDC invests across a variety of debt products including infrastructure, real estate, mezzanine and senior debt. He adds that there is definitely a large appetite for mezzanine lending.
“There is an increasing interest in mezzanine capital, a product that can plug the financing gap when the availability of senior debt from the bank market is limited, either in amount or tenor,” Palmer says. “Mezzanine can be the key to optimising the allocation of risk to the market, enabling transactions and investment to happen.”
Despite many players looking to fill the gap, investing in the African market presents a much more complicated strategy than other regions and the investing timeline is longer.
“The structural framework of investing in Africa is still a problem,” Latif says. “Africa is a challenging place to do business. Different countries require different structures and their own legal framework.”
In combination with differing currencies and legal frameworks, these factors slow down the deal process, which also slows down market and economic growth.
“It is niche; there are a relatively small number of deals that meet investment criteria and for whatever reason cannot be fully serviced by the banks,” Albinski says. “We look at 100 deals to do one or two.”
The other major issue mentioned by firms is that it’s difficult to secure enough commitments from LPs to grow investment in the region. This may take years to change.
“There is a bit of a supply shortfall in the sense that there is great demand for credit among African SMEs, but what we are finding is that, for various reasons, institutional investors haven’t provided the level of funding required for credit managers to fully meet this demand,” Apampa says.
Obasanjo-Adeleye says that while the local LP base understands the risks and the supply/demand for private credit better than foreign LPs, the region is still dependent on getting supplementary foreign LP capital.
To lower risk, many private credit lenders in the region pair up with local and foreign banks on transactions to allow for additional protection and to help build relationships on the ground in various locations across the vast continent. This also helps build managers’ track records for lending in the region.
“As more fund managers are able to demonstrate their skill in that space, there will be more LPs wanting to support private credit in Africa,” Obasanjo-Adeleye predicts.
But for now, those who operate Africa strategies think it is well worth it, and the market continues growing, albeit slowly. Palmer says that demand continues to be large, with plentiful opportunities for lenders across the entire continent. “I think that you do come across wonderful opportunities even in a slow growth or no growth economy,” Albinski says.