The majority of markets within Africa are growth capital-only zones; persuading family-owned businesses to relinquish control of companies, even in exchange for potentially faster growth, can be difficult.
In South Africa, which has a comparatively developed buyout market, debt financing for deals is dominated by four large banks: Standard Bank, FirstRand, Ned Bank and Barclays-controlled Absa Group. Outside South Africa, Standard Chartered, Standard Bank and Barclays are the only large international banks active across multiple geographies – although development finance institutions such as the African Development Bank, the Development Bank of Southern Africa and the International Finance Corporation are also potential sources of debt.
High yield and mezzanine [debt] are still very, very unlikely
But the financing used in African buyouts almost exclusively involves senior secured debt. More importantly, demand far exceeds supply. So a key factor in the development of African private equity will be the ability of market participants to bridge this gap between sponsors and lenders.
“High yield and mezzanine [debt] are still very, very unlikely – simply because of the fact that, even on a senior secured basis, the debt can be as high as 20 percent in local currency,” says Zain Latif, founder of TLG Capital.
Latif adds: “I think the problem in Africa today is the lack of private equity in the sub-$15 million range, because if you had far more experienced private equity managers then you get more capital into the local system. Banks will also take a lot of comfort in the fact that there’s intelligent capital backing a business – and that is somewhat lacking in Sub-Saharan Africa.”
There are also logistical and regulatory issues. In a continent with as many different languages and legal systems as Africa, securing debt financing in one country for use in another is extremely difficult.
So while positive economic indicators paint a promising picture for future private equity investment in Africa, the continent will likely remain a growth-capital dominated area until debt financing becomes more available, thereby facilitating the development of a more traditional buyout market.