The African private debt market is often overlooked by institutional investors and debt funds, but the success of some operators prove that the opportunities are there.
BY: DAVID BROOKE
PUBLISHED: 25 AUGUST 2016
“I can simply look out of my window and see that there is a problem,” says Viola Llewellyn, co-founder of Ovamba Solutions, a provider of financing for West African small and medium-sized enterprises. The view outside her office window of goods piling up in the port of Douala in Cameroon may not paint a pretty picture, but it’s a vivid image of the scale of the problems African businesses face accessing credit.
Many of the companies Ovamba works with see their imported goods held in ports as they struggle to access the capital required to move them into wider African market. It’s a small part of the much bigger story of the $360 billion credit gap the World Bank estimates exists across the continent.
Port of Douala
As for SMEs in Europe, tapping into capital from banks can be difficult. African banks restrict loan sizes to the amount a borrower has in their account, ultimately preventing them from scaling up. The restrictions do not end there. Anecdotes shared with PDI reveal that women-led businesses are sometimes denied credit on the basis of gender and a fundamental misunderstanding of start-up pharmaceutical firms has led some banks to classify them as scientific operations not businesses, as though they were mutually exclusive.
Slow decision-making at the banks only adds to frustrations, but the inability of SMEs to tap into credit has broader issues for Africa. According to research by the African Economic Outlook, more than 90 percent of businesses operating across the region are classed as SMEs. It is here where Ovamba has had success, announcing a partnership this year with peer-to-peer lenders CrowdCredit and Courtyard Capital, based in Japan and the UK.
At the higher end of the market, opportunities for private debt funds are growing and European funds are taking note. Amid falling commodity prices and a fluctuating currency rate, a number of South African banks are de-risking their activities and ticket sizes ranging $10 million-$40 million are on offer. It means a space is cleared for a number of mezzanine-focused funds to step in and assist with financing. One such fund, Vantage Capital, based in South Africa, is already on its third fund and targeting a final close of $260 million by the end of 2016. Last year, Investec Asset Management raised $226 million on a final close, a fund offering yields of 7-8 percent over Libor.
For a continent rich in natural resources, infrastructure projects play a key role and offer debt funds the chance to step in with financing. The oil and gas company New Age recently obtained a $425 million senior secured facility from a group of five lenders, including EIG Global Energy Partners and Africa Finance Corporation. New Age chief executive Steve Lowden said at the time that it means the company has “an exceptionally strong balance sheet at the bottom of the commodity cycle”.
Nevertheless, lending money in Africa is still in its early stages. Investors often find the response of governments to private debt ranges from bewilderment to largely supportive of certain projects. Getting investors comfortable with working in the region also requires a network of partnerships to source the right opportunities, but one lawyer working in Africa says he is receiving enquiries from European debt funds.
With so much focus on Brexit, China and the US elections this year it is easy to forget that Africa has been through its own economic rollercoaster. As banks scale back their activities, the demand for credit can only grow for SMEs and in the mid-market. The opportunities are there is what many keep saying, but achieving that balance of being first to take the step, but ensuring a framework to complete investments is important.
As one investor says: “It is about getting the correct mix of investing in a market that is developed enough, but is still relative virgin territory.”
As first published by Private Debt Investor