From small to larger ones, companies in Africa are still grappling with access to credit, more so from domestic banks.
This has seen the nascent of private credit/debt for a strong capital base, an initiative that is being popularised by huge venture capital (VC) deals in the continent’s ever-expanding tech sector.
According to Africa Business, Private debt – commonly known as private credit or private capital – is a form of non-bank lending where funds provide loans to businesses with set repayment terms and interest charges.
According to the African Private Equity and Venture Capital Association (AVCA), the total value of private capital deals reached a record high of Ksh.958.4 billion ($7.4 billion) in 2021, representing a 118 percent increase compared to Ksh.440.3 billion ($3.4 billion) in 2020.
The record amount was almost double the Ksh.518.1 billion ($4 billion) that was invested on an annual average basis in Africa between 2016 and 2020.
Private debt is seen as an attractive alternative to equity because founders and business owners typically do not want to “dilute their share of ownership” by bringing in a new partner in exchange for finance.
“If you look at private credit in more developed markets it is huge, representing more than Ksh.155.3 trillion ($1.2 trillion). In Africa, there is a big need in the market. It’s a space that private credit funds can easily fill and that is why it is growing,” says Jo Fry, Investment Director and Head of Intermediated Credit at British International Investment (BII).
Walid Cherif, founder and managing director of Blue Peak Private Capital says many of the businesses in Africa are also family-owned businesses and this creates further barriers to the sale of equity. Private debt, in this case, maybe a better choice, but with private debt investment instruments still relatively unknown in Africa, it is harder to roll them out at scale.
Another problem debt funds face is raising money from investors, especially in today’s tough economic climate.
“The biggest challenge in our business is raising capital from commercial investors,” he says. “A lot of European and US investors still perceive the risk of Africa as higher than elsewhere. We will demonstrate that that is not the case”.
He says that Blue Peak Private Capital has so far mostly relied on development finance institutions (DFIs) for capital, but budgets are limited.
The way to attract more capital, according to Cherif, is by proving that private debt investments can create good returns for investors and value for businesses.