Africa is perceived as a high risk continent in general with investors expecting a high yield for investments they make. This perception is a self-fulfilling prophecy; in their quest for high yield, investors allocate capital under unsustainable conditions, which unsurprisingly results in underlying entities not growing (hence not achieving their exit potential) or failing to survive. Case in point – over the last 10 years, PE investors in Africa were promised 25+% returns by PE firms. The result and in this quest, almost no investment firm was able to achieve its hurdle rate 6-8% – let alone coming close to the 20% return target. This has resulted in further constraints on capital being allocated to Africa. To me this isn’t a fair deal for the continent. It requires perceptions to change.
African challenges are abundant and rampant. There is no denying this. But this is no different to any other emerging market economy – that is waiting for sophisticated investors to come in and be the harbinger of dawn. For the most part, Africa is still waiting. Local and regional banks don’t have the appetite to lend to mid-market businesses, which are the bedrock of emerging economies, hiring anywhere between 40-75% of the countries workforce, yet are not ‘invest-able’ according to most financial institutions.
This perception needs to change and the angle which works best, in my view, is self-liquidating, downside protected capital – invested under flexible and amenable terms into African businesses. My experience shows that this form of investing almost always positively surprises investors – and the outcome is mutual gain – positive and quantifiable returns for investors and businesses that achieve their growth potential.
The panel I’d like to put together talks about private credit as a developing asset class in Africa and the extraordinary benefits it offers to both investors and businesses. This equitable financing not only offers investors an uncorrelated asset class to public/private equities or public credit, but also creates positive impact across the ecosystem. Investors or allocators, on a risk adjusted basis, can demonstrate a healthy yield and businesses can demonstrate growth while governance is solidified – as all parties are aligned and disciplined in their methods and achievements.
The business, given they can see the light at the end of the tunnel, i.e., post maturity of the credit facility, they will own the business in its entirety along with its cash flows are focused on the long game. Investors have a finger on the pulse, not only through board/observer seats and monitoring committees, but tangibly through cash flows they regularly receive from the business (coupon or principal repayment).
The private credit business model is far removed, from the hope and prayer model we have grown accustomed to in private equity and venture capital in Africa. This is an asset class that has the potential to demonstrate real and accomplished yields for investors while improving the continent. The additional benefit is, while equity is near impossible to hedge in terms of currency, there are mechanisms to ward off currency depreciation cycles on the continent through credit instruments.
The question remains, with all these clear and evident benefits, why isn’t this asset class on top of private capital allocators’ agenda? What challenges stem the flow of this capital and what can investment managers, which operate effectively in Africa, do to appease the risk demons of investors?
