The Role of Private Debt in Supporting African Economic Growth
The annual conference of AVCA, Africa Venture Capital Association, was hosted in Johannesburg in April 2024. It was the first time the event had been hosted in Johannesburg in 20 years. The event featured distinguished delegates, from across the private capital space including, private equity, private credit and venture, as well as a range of limited partners and other stakeholders. The panels represented the diversity of interests at the event. A flagship panel was the private credit panel discussing the successes of the asset class in Africa over the last decade. Verdant Capital, Old Mutual Alternative Investments, Sahel Capital, and Betula Growth were represented on the panel.
Mujahed Assem from Old Mutual Alternative Investments opened the discussion stating that private debt started gaining traction post the global financial crisis, becoming increasingly significant with rising interest rates and economic uncertainties. Traditional forms of credit became less accessible to companies with complex capital structures. Private debt offered these companies tailored solutions that met specific borrowing needs, providing a structured product that maximized returns while minimizing risks.
In addition, he pointed out that several factors drive the growth of private debt in Africa. Economic conditions have made it challenging for companies to access traditional credit, leading them to seek private debt as an alternative. Investors find private debt attractive for its potential to deliver better risk-adjusted returns and diversify their portfolios. However, private debt is not without risks, underscoring the importance of experienced fund managers who can structure these products appropriately.
A key discussion point is the dichotomy between sector-specialized, geographically diversified investments and country-specialized, sector-agnostic opportunities. Edmund Higenbottam from Verdant Capital highlighted the benefits of a sector-specialized approach, which allows for deep expertise and informed investment choices across different regions. Conversely, country-specialized strategies may struggle due to the difficulty of achieving the same level of expertise across multiple sectors. Edmund continued by highlighting Verdant’s view that credit opportunities in the rest of Africa typically offer higher rates for the same overall risk compared to opportunities in South Africa.
Tosin Ojo from Sahel Capital explained how private debt complements private equity by providing flexible capital structures that can support growth alongside traditional bank debt. This synergy allows businesses to optimize their capital structure, driving better internal rates of return (IRRs) for private equity investments. Furthermore, private debt professionals often speak a common language with private equity professionals, facilitating smoother transactions and better-aligned interests.
The panel agreed that private debt plays a crucial role in supporting African businesses, offering tailored financing solutions that traditional credit markets often cannot provide. As the market for private debt continues to grow, it will be essential for investors to work with experienced managers who understand the complexities and risks involved. By doing so, private debt can contribute significantly to the sustainable economic growth of the continent, fostering an environment where businesses can thrive.
To watch the full discussion, click here to go to our YouTube channel.