The Untapped Potential Of Private Debt For Africas Mid-sized Businesses And For African Institutional Investors

Africas growing mid-cap businesses are a vital component of the continents economic future. Positioned between numerous small and micro-enterprises and a few large corporations, they drive growth, innovation, and employment. The majority of companies in Africa are micro companies SMEs, around 75 to 90 depending on the industry.

Despite their critical role, mid-cap businesses often lack access to the capital needed for growth. Mezzanine finance, a promising but underutilised form of private debt, bridges the gap between senior lending and equity. In Africa, private debt remains largely untapped, representing a missed opportunity to fund high-growth sectors like health, education, and nutrition, which need substantial investment to scale and innovate.

The global private credit market reached new highs 1.7BN at the end of 2023 yet a mere 0.3 of it reaches Africa. This reflects a global shift, with more companies opting to raise capital through private rather than public markets. While private credit is more prominent in developed markets, it has also gained traction in emerging markets.

The continent faces a credit gap of 360 to 400 billion, highlighting the urgent need for new financial solutions to support growth, and liquidity. Private debt accounts for only 7 of total funding raised in Africa, significantly lagging behind other asset classes such as venture capital and private equity. Despite its advantages, mezzanine finance remains underrepresented, comprising just 3 of the private debt market in Africa. In comparison, senior direct lending dominates, accounting for 84 of all private credit in Africa.

Existing financing options pose significant challenges for many mid-cap businesses in Africa. Senior debt is cheap but mainly available to large-cap companies and comes with stringent conditions, including strict covenants, high collateral requirements, and a negative impact on leverage. Rigid repayment structures, particularly when companies need to invest in growth, make senior loans an imperfect solution for mid-cap companies. Moreover, senior debt provides a limited amount of capital, typically capped at 2x EBITDA, and is mostly available to large-cap companies.