Private Credit and Africa
I’ve written frequently about private credit, usually with a disparaging tone. My bone of contention with the asset class is that it’s the latest craze, in an industry with an inherent lifecycle of crazes. I understand the driver of this cycle: people in charge of revenue centers need to generate revenue, otherwise they get fired. If everyone is piling in and making money, then you need to pile in and take part. However, this doesn't preclude me from stating that piling on results in a decline in lending standards, and allocating more capital to origination will crowd out allocations for risk management and operations. Factor in the frenzy to fund datacenters, and I can only conclude that private credit in the developed world is just another example of financialization: chasing fees and not adding value. What is happening in sub-Saharan Africa is capitalism in its original sense: deploying scarce capital to increase the output of goods and services, and raise living standards.
Asset managers like TLG Capital are raising funds and lending to businesses in sub-Saharan Africa with the expectation of growth, returns and follow-on lending. TLG’s most recent fundraising is a $120MM second round of its Africa Growth Impact Fund (“AGIF”), with investors from both impact funds and traditional market funds.
TLG is able to overcome resistance to direct investing in Africa by leveraging the quality and reach of African banks to speed up origination and using Standby Letters of Credit to transfer downside protection from a local, bespoke process to an enforceable and liquid process backed by SWIFT. This is described in greater detail by Yannick Deza in this detailed essay. The funds are deployed across SMEs in multiple secondary and tertiary sectors: details on example AGIF investments are here and here. The methodology enables not just a longer-horizon view on the part of TLG and its partners, but serves as a template for other potential lenders and investors.
Another example of going beyond traditional financing orthodoxy is TLG’s separate joint fund that sources funds from local investors in Nigeria, rather than foreign portfolio investment, obviating currency risk and ensuring a base of more patient investors. A press release describing the Nigerian fund’s investment is here. Similar to AGIF, it has quickly made investments in existing companies that serve diverse domestic needs in the Nigerian economy.
All of this represents what private credit is supposed to do: match expertise in lending with unique and underserved borrowers seeking capital, with the goal of making enhanced returns while actively managing risk. The outcomes of this are material: the enterprises grow, generating wealth for founders, owners and investors, who will then either spend or re-invest at all levels of the economy. Growing companies in these segments hire more workers at living wages. Steady incomes for employees will lead to increased consumption and investment and allows their children to attend school rather than drop out to earn wages. The country can shift from primary to secondary industries, fostering a generation of engineers, logistics and finance professionals who will stay to create their own businesses, rather than emigrate.
In the context of capital markets, the natural progression from the success of African private credit would be more interest from larger-scale lenders and greater participation by African issuers in EM corporate bond markets, creating a virtuous cycle of investment, economic growth, poverty reduction and greater wealth creation. That’s the actual value proposition of credit, and I hope that the work being done in Africa becomes a bigger part of the private credit narrative.