The African Private Debt Market
As of today, many SME businesses throughout Africa still lack access to bank capital. High-risk profiles and an overall lack of long-term debt products ouside South Africa are only some of the factors explaining the existing credit gap. According to the IFC, this credit gap for SMEs in Sub-Saharan Africa amounts to $70-90bn per year. A global comparison shows that Africa has the lowest levels of credit extended to the private sector by banks (31.8% of GDP, 2018 World Bank). In our opinion, this gap creates very attractive yield opportunities for private credit investors.
In addition to the aforementioned credit gap, the rise of responsible investing and ESG has led investors to increasingly take into consideration also their social impact. The African continent presents an opportunity to make a positive impact on the continent that arguably needs it the most.
Recently, European private credit investor have started to take a leap into the African market. The focus has been on providing financing for the African mid-market and investing in retail businesses in Rwanda, healthcare businesses in Liberia and fintech companies such as MyBucks, which helped open the first bank in a Malawian refugee camp.
By employing additional measures such as requesting quarterly distributions these firms manage to exercise tighter controls on their investments.
Despite many players looking to fill the gap, investing in the African market requires an increased due diligence effort compared to other regions and the investing timeline is longer: different countries with different structures, currencies and own legal frameworks slow down the market growth. For these reasons, institutional investors haven’t yet provided the level of funding required to meet the overhang in demand.
We anticipate an increasing number of investors in the African continent in the upcoming years, driven by the relentless search for new opportunities and the necessity to do good. Initially, we expect foreign investments to be centered around high-quality debt, while slowly growing comfortable with this new region. However, given the very attractive yield levels and the uncorrelated nature of returns, we expect foreign investors to quickly venture into the local private debt market.
(1) Lenders eye 'seismic shift' in African debt, privatedebtinvestor(dot)com
(2) The Investment Case for African Private Debt, preqin(dot)com