Private credit in Africa: Opportunities, challenges and LP views

Ahead of SuperReturn Africa, we spoke to Jo Fry, Investment Director & Head of Intermediated Credit, British International Investment, about how private credit has grown in Africa in recent years and where it's expected to go in 2024. British International Investment is the UK’s development finance institution and impact investor. BII has been investing in emerging markets including Africa for 75 years to promote productive, sustainable and inclusive economic growth. Learn more about their work and where private credit sits in an Africa context in our Q&A below, and watch our interview with Joe Mate, Investment Director, Intermediated Credit, British International Investment, from SuperReturn Africa 2023.

Private credit in Africa is a different ballgame than US and Europe. What role does it have to play in an Africa context - or maybe, what role does Africa have to play in the future of private credit?

Over the last decade and a half, private credit as an asset class has grown significantly. It’s grown particularly in developed markets, driven by credit shortages as stringent bank regulation (such as Basel III) caused a retrenchment in mid-market lending; and institutional investors sought higher yields and assets to deploy excess cash.

The size of the private credit market was estimated at US$1.4 trillion at the start of 2023 by Bloomberg while Preqin expects the market to grow to $2.3 trillion by 2027. However, non-bank lending is still nascent on the African continent, and credit formation more broadly is relatively low when compared to developed markets. This suggests there is significant room for growth.

Private credit has a similar role to play on the continent as it does elsewhere, providing alternative lending, outside the banking market and focusing on cashflow lending to better meet the funding needs of companies. Catalysing growth of the asset class will prove its commercial viability and mobilise additional capital, deepening the non-banking lending market and narrowing the credit funding gap on the continent.

By showcasing more examples of opportunities to generate strong risk-adjusted returns, investors develop a better understanding of the real risks they face when it comes to investing in Africa. For example, we saw Vantage raise significant commercial capital in their 4th fund – in which we were an anchor investor – as other commercial investors could see the performance of their previous funds.

How are LPs viewing their opportunities in private credit in Africa?

The asset class is growing considerably in Africa, reflecting investors’ endorsement of its impact on growing businesses and industries across the continent and its ability to generate returns. Between 2021 and 2022 we saw over 700% growth in private credit transactions. This is especially exciting for bankable mid-market companies who can’t source the type of financing that they require from the banks.

As a development finance institution (DFI), BII looks at the opportunity slightly differently. BII is looking to support the demonstration of the commercial viability of the asset class and to increase the amount and range of financing options for mid-market companies. The importance of SMEs to African economies - increasing jobs, strengthening local supply chains, and encouraging more regional trade – is a further catalyst for investor interest in addressing the credit dislocation in Africa. The fundamental features of private credit – including downside protection, better visibility on cashflow and limited reliance on event driven exits – are well suited for investors with a risk-adjusted approach, looking for diversification and non-correlated returns.

What are some of the biggest trends you’re seeing in private credit in Africa? Any particular sectors or regions worth noting?

With the market still growing, we see greater prevalence of generalist funds lending across a range of sectors and with broad geographical remits. Taking an expansive strategy widens the availability of opportunities to invest in but also significantly strengthens diversification and minimises specific country risk. It also allows for mid-market investments, which ultimately strengthens fund economics as smaller deal teams are able to oversee these transactions.

Notwithstanding their generalist mandate, these funds have demonstrated alignment with globally relevant impact themes, such as addressing the climate emergency. Such approaches resonate with the objectives of impact investors like us and encourage support of their funds to build track records and further mobilise commercial capital.

This does not negate the need for funding vehicles to support investments in a single market. There is a need for more innovative methods of channelling capital into one country, as BII has recently established with the first-of-its-kind Growth Investment Partners Ghana - a company providing patient, flexible local currency financing that fills gaps unmet by traditional and alternative lending.

What barriers face the asset class and what solutions and structures can be put in place to tackle them?

The current higher interest rate environment means that international investors have less incentive to invest outside developed markets. We are however seeing greater appetite from local African pension funds, for example, to fill some of this void. Africa’s institutional investors are more alive to the possibilities of backing funds generating high impact matched by financial returns.

To build momentum and track record of private debt as an asset class for private investors, DFIs are there to demonstrate that this is an investable strategy with sufficient opportunities that can generate commercial returns. Whilst fundraising remains challenging, we are beginning to see progress. As an example, BluePeak Private Capital, in which BII has invested, recently reached final close on its fund – and included a commitment from a leading African commercial investor. Bluepeak have deployed funds rapidly, with a broad sector and geographic remit, applying innovative and solutions-focused structures to investments in real economy businesses.

Looking to 2024, what do you think will be the biggest growth trends within African private credit? Are there any measures you’d like to see taken or changes you’d like to happen?

I see progress being made. Credit funds which have raised capital will continue to make investments, deepen their track record, as well as the market’s track record. This will contribute to the continued growth of the asset class, make Africa’s capital markets more sophisticated and improve capital availability for businesses across industries. This will continue to attract DFIs, which will then attract more commercial capital, and hopefully lead to a virtuous cycle.

Want to learn more about private credit in Africa? Watch our interview with Jo Fry's colleague from British International Investment, Joe Mate (Investment Director, Intermediated Credit):