Navigating South Africa’s alternative investment landscape with mezzanine finance

Navigating South Africa’s alternative investment landscape with mezzanine finance

Navigating South Africa’s alternative investment landscape with mezzanine finance 768 512 Tamela

While the world remains divided over whether the global economy will weaken this year, amid inflationary pressures, escalating geopolitical tensions, and social unrest, the aftershocks have extended into global credit ecosystems as both borrowers and lenders adapt to new economic realities. Similarly, there has been a strong shift from public markets to private markets, as companies elect to raise capital through private rather than public channels with an increase in public to private transactions.

Private credit is a crucial component of financial markets and has played a strong role in providing access to financing the economy. Although private credit is more prominent in developed markets, it has gained notable traction in emerging markets, including South Africa. Over the years, the sector has expanded with a growing number of non-bank financial institutions aiming to complement traditional bank finance. These institutions have focused on mezzanine finance solutions for mid-market companies looking to implement various corporate strategies such as growth and expansion, organisational restructurings, and acquisitions, among other uses. The appeal of mezzanine debt is underpinned by its flexibility, higher risk and return thresholds, and expedient approval processes.

Regulatory changes have also played a key role in shaping the mezzanine market in South Africa. The latest amendment to Regulation 28 of the Pension Funds Act, 24 of 1956, which came into effect on 3 January 2023, significantly impacts the landscape. Before this amendment of Regulation 28, hedge funds, private equity, and any “other assets” were grouped as a single asset class with a 15% allocation cap. The recent amendments, however, separate these categories and increase the allocation limit specifically for private equity from 10% to 15%. This change is particularly significant for mezzanine financing, which falls under the private equity category. The higher allocation limit opens up greater investment opportunities for pension funds and other institutional investors, acting in synergy with economic and business factors to solidify mezzanine financing as a valuable and increasingly popular investment vehicle in South Africa’s complex and evolving financial landscape.

The growth of mezzanine financing in South Africa has been shaped by various economic, regulatory, and business landscape changes, some of which are specific to the country’s unique environment.

The immediate aftermath of the pandemic saw liquidity constraints and a low-interest rate environment, compelling borrowers to look beyond traditional lending solutions. Private firms, particularly, turned to mezzanine financing as a reliable method for funding acquisitions and growth. This trend has contributed to broader recognition and utilisation of mezzanine funding in the financial landscape.

In sharp contrast, as interest rates began to rise, the cost of servicing traditional floating-rate debt has become a growing concern for borrowers. Higher interest rates can lead to increased default rates, as companies find it more challenging to meet their financial obligations. Mezzanine financing, with its flexible terms and equity-linked yields, offers an alternative that is attractive to borrowers and provides a level of defence against inflation for lenders.

How can we help?

Tamela Capital Partners provides South African Rand (“ZAR”) funding of between ZAR50 million and ZAR200 million to companies in South Africa, Namibia, Botswana, and Lesotho seeking capital for growth and expansion. Tamela Capital Partners is an independent fund manager and is one of the few credit-oriented alternative asset managers in Sub-Saharan Africa.

For more information, please contact Sydney Mhlarhi on +27 82 852 3366 or or Dineo Matjila on +27 76 426 4455 or

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