We’re all familiar with the private debt story. Stringent regulations imposed on banks after the global financial crisis resulted in a retrenchment of lending to smaller and riskier borrowers. In response, private debt providers plugged the gap throughout the US and Europe, transforming credit markets in the process.
But this transformation has yet to play out in emerging markets, where the same bank retrenchment could also be witnessed after a period of heady expansion of credit in the lead-up to 2008. The key difference? Private lenders haven’t stepped in as much to fill the void.
Nowhere is this more evident than in Africa, which has a trade finance gap of around $100 billion. African countries benefit from fast-growing populations and rich natural resources. In some cases, major infrastructure changes and leaps in innovation are transforming growth prospects. For lenders, there is a significant opportunity to help grow and standardise trade flows via structured financial solutions.
But investing in Africa often comes with higher degrees of risk, relative to other emerging markets. Years of over-exposure to the whims of commodity prices and the increasing demands from relatively young populations drive the need for rapid change. What’s more, operational realities in these countries mean that lenders are forced to adopt a more flexible and dynamic approach to business.
We have found that moving to a “one-stop” funding and supply model, combining large-scale direct lending with physical merchanting services, is the best way forward in this challenging region. This means that structuring experts work alongside commodities traders in order to not only provide funding, but also self-originate deals and manage intricate cross-border supply chains.
Adopting this approach has several benefits. For borrowers, it means access to solutions that meet their often-complex needs via one provider, with positive implications for pricing and flexibility. From an investor perspective, it provides greater credit control, with better protection and higher potential returns for the risk incurred, together with the enhanced ability to enforce strong ESG standards across the whole supply chain.
Clearly, a strategy like this comes with costs. To make it work, on-the-ground presence across several markets is required to monitor deals and logistics, as one continuously engages with local counterparties.
That also means operating with a long-term and pragmatic mindset, recognising the need to deal with constantly changing realities and the need for commitment to gradually build trust with clients and other stakeholders.
The potential returns, however, are compelling for those with an entrepreneurial spirit and the willingness to embrace complexity. Rudyard Kipling once said, “One cannot resist the lure of Africa.” Expect investors to start following his advice.
Atanas Bostandjiev is CEO of Gemcorp.