The African Private Equity and Venture Capital Association (AVCA), the pan-African industry association, today released its first comprehensive report looking at the private credit asset class in Africa. Private Credit Strategies in Africa explores the opportunities and challenges the asset class faces by incorporating perspectives from General Partners (GPs) and Limited Partners (LPs).
The report notes that while private equity (PE) has historically been more prevalent in Africa than private credit, this asset class encompasses a range of strategies that can provide attractive alternative financing options for African small and medium-sized enterprises (SMEs). African SMEs often face challenges in accessing capital from traditional providers (banks) and may be reticent to dilute their ownership with private equity – this is the gap that private credit can mitigate.
The report also presents the results of interviews conducted with firms currently or formerly active in Africa’s private credit markets. Respondents touch upon different topics pertinent to the industry, from its level of competition and the method in which opportunities are sourced, to the strength of the protections for debt covenants in Africa, to the extent and nature of the market’s exposure to macroeconomic cycles. A key theme that emerged from the research revealed despite the high level of demand from African SMEs, private credit remains constrained. Respondents noted that misperceptions around private credit’s risk-return profile need to be addressed for institutional investors to become more open to backing the industry.
Private Credit in Africa provides further context to these themes through an LP survey. It found that while most LPs expect African private credit to be more attractive compared to other emerging markets and to developed markets over a ten-year time horizon, factors such as currency risk, GPs’ limited track records, and legal, regulatory, and tax issues are some of the key challenges that they face when seeking to invest in the asset class in Africa.
Enitan Obasanjo-Adeleye, Director, Head of Research, AVCA, says: “This is AVCA’s first in-depth research undertaken on the private credit market in Africa. As the data reveals, there are encouraging signs that adoption of this asset class is set to grow on the continent, providing additional avenues for companies to raise capital for their expansion and create much-needed jobs. We look forward to building on this work at our upcoming annual conference in Nairobi where we will be presenting our findings and hosting a panel discussion on the topic.”
