Todd Micklethwaite, Head of Distribution: Alternatives at Sanlam Investments, examines and provides context for the current private debt investment opportunities present in Africa, and where he thinks this will lead the region's private debt industry.
The IFC estimates that the credit gap for SMEs in Sub-Saharan Africa is currently $70-90bn per annum. The case for investing in private debt in Africa is premised on the inability of local and international banks to provide finance on reasonable terms or to the extent required by borrowers (with local banks limited in balance sheet capacity and large international banks subject to strict regulatory capital constraints). The need is significant relative to global peers; Africa has by far the lowest levels of domestic credit extended to the private sector by banks (31.8% of GDP according to 2017 World Bank figures).
Lower-quality debt in developed markets is increasingly coming into investors’ consideration due to spread compression on higher-quality debt. With similar high yields available in Africa for shorter- dated, senior-secured exposure to borrowers with solid credit metrics, we anticipate a significant increase in attention paid to African private debt by those comfortable with the asset class but less familiar with the geography. Furthermore, we expect an increased focus from investors already invested in unlisted equity and property in Africa, but coming to terms with the difficulties involved in exiting investments within applicable investment horizons. While Africa term debt offers lower returns, exposures are self-liquidating due to the amortizing nature of the loans.
Many investors also see the critical credit funding gap as an opportunity to use their capital to make a positive impact on the continent whose citizens arguably need it most. Debt funding supports the growth of Africa’s capital markets and broadens the financial inclusion of its citizens. Development Finance Institutions are already active in Africa and we expect commercial investors to follow suit in earnest once they have developed reassurance on issues that may have prevented them from investing in the past (e.g. concerns around the ability to execute and manage deals to maturity, and misperceptions regarding risk-adjusted returns).
We anticipate that new investors in the continent will seek to do so initially in the form of high-quality debt (i.e. senior-secured transactions, lending to growing but established companies) through fund managers with an embedded presence across the continent. As investors become comfortable with the continent and build out their Africa private debt programs, we expect them to provide longer-dated debt, move down the finance structure, or fund riskier companies and/or jurisdictions, in pursuit of higher returns.
The door is open for investors to make an impact in Africa, where opportunities abound for earning consistent, uncorrelated, attractive risk-adjusted returns. But investors need to adapt the strategies that work in more developed markets to those that work best on the continent.
For expert commentary, key trends, historical statistics and survey results, take a look at the newly-released 2019 Preqin Global Private Debt Report – the most complete and in-depth review of the industry available.