Private credit set to grow in Africa

Private credit, across a range of strategies, can provide attractive alternative financing options for African small and medium-sized enterprises (SMEs), according to new research produced by the African Private Equity and Venture Capital Association (AVCA).

The report, entitled Private Credit Strategies in Africa, contextualises the asset class within the African market, exploring the opportunities and challenges it faces by incorporating perspectives from general partners (GPs) and limited partners (LPs).

It notes that while private equity (PE) has historically been more prevalent in Africa than private credit, African SMEs often face challenges in accessing capital from traditional providers (banks) and may be reticent to dilute their ownership with private equity, creating a 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, touching on different topics, 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.

One key theme that emerged from the research is that despite the high level of demand from African SMEs, private credit remains constrained. Misperceptions around private credit’s risk-return profile need to be addressed for institutional investors to become more open to backing the industry, respondents noted.

The research also noted that while most LPs expect African private credit to be more attractive compared to other emerging markets, and to developed markets, over a 10-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, AVCA’s director and head of research, noted: “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.”

Find the research here.