A look at the private credit market in South Africa

A look at the private credit market in South Africa

600 400 Tamela

Globally an increasing component of alternative assets under management (AUM) is private debt, which is now the third-largest alternative asset strategy behind private equity and venture capital…

Globally an increasing component of alternative assets under management (AUM) is private debt, which is now the third-largest alternative asset strategy behind private equity and venture capital. Private debt refers to debt funding provided to corporates by non-bank financial institutions. Here Tamela gives some insight into the dynamics of private debt.

Private debt is a category that includes senior debt, mezzanine debt* and distressed debt. According to PitchBook, private debt managers raised $191 billion in 2021 – a bounce-back of 12% following an 8% COVID-19 affected decline in 2020. Although private debt has been a component of alternative assets strategies for a long time, its growth has been spurred by the post Global Financial Crisis bank regulation tightening, institutional investor search for yield, and increasing asset allocations to alternative assets.

Globally private debt AUM has grown from $271 billion in 2009 to $800 billion by 2019, according to the International Finance Corporation (IFC). This represents a compound growth of 11.4% over the past decade. In contrast, growth in South African credit extension by banks to non-financial corporates has been slowing since the last quarter of 2016 and turned negative in 2021 according to the South African Reserve Bank’s (SARB) 2021 Financial Stability Report. Fundraising by private equity managers declined by 22% in 2020 according to the SAVCA 2021 Private Equity Industry Survey. The decline in funds raised driven by the COVID-19 pandemic interrupted an upward trend in funds raised from R10.2 billion in 2016 to R21.7 billion in 2019.

Anecdotally, this significant growth in global private debt AUM and funds raised is mirrored in South Africa. However, tangible data in this country on private debt is still scant despite the increase in managers focusing on it. It’s therefore an opportune time for the private equity industry publication (i.e., the annual Southern African Venture Capital and Private Equity Association [SAVCA] Private Equity survey) to categorise AUM into private debt and private equity to provide valuable data points to stakeholders and match the increasing institutional appetite for the asset class. This is particularly relevant now as in line with the global bounce-back in private debt and equity funds raised during 2021, it is anticipated that South Africa will show a similar trend when the forthcoming SAVCA 2022 survey is published.

Private credit, especially mezzanine debt, offers institutional investors regular income distributions and capital appreciation, often in a form of equity upside.

* Mezzanine debt refers to that component of funding within a company’s capital structure that is wedged between senior/bank funding and equity and complements the equity funding from the shareholders of the company.

How can we help?
Tamela provides funding of between R50 million and R200 million to companies in South Africa, Namibia, Botswana, and Lesotho seeking capital for growth and expansion.
For more information, contact Sydney Mhlarhi (sydney@tamela.co.za) or Vusi Mahlangu (vusi@tamela.co.za)

Tamela Capital Partners
Tamela Capital Partners is an independent fund manager and is one of the few credit-oriented alternative asset managers in Sub-Saharan Africa. The Tamela Mezzanine Debt Fund I, which reached a final close in 2021, is a c.R1 billion fund that provides mezzanine debt to mainly mid-market companies for expansion and growth.