Bridging Prosperity: The Rise of Mezzanine and Private Credit in Africa

In this interview AVCA and Edmund Higenbottam , Managing Director, Verdant Capital explore the critical role of #mezzanine and #privatecredit as an emerging asset class, their strategic function in bridging funding gaps, and the ongoing discussion surrounding the uptake of their adoption.?

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?To set the stage, tell us about the focus of the firm in a few sentences.?

Verdant Capital Hybrid Fund is a US$100mn fund specialising in digital finance and alternate credit.? We invest in profitable proven growth-stage businesses which are disrupting the financial sector which supporting micro-entrepreneurs and small businesses. We invest in a range of mezzanine type instruments which reflect the needs of the investee and our own risk-return criteria.

Increased uptake of mezzanine and private credit has been expected in recent times. Can you shed light on whether this speculation holds true? Have you observed a growing interest in these instruments amongst businesses and investors in Africa???

I think amongst businesses in Africa there’s always been a strong interest in mezzanine capital because it provides business owners and shareholders an ability for risk-sharing capital with a lower amount of dilution in terms of share ownership. It is quite a popular choice for many entrepreneurs, business owners and shareholders. In terms of the size of the asset class compared to the overall private capital market, I think private credit has about 10% of the amount of capital that private equity has and investors are increasingly looking at private credit because of its performance in Africa over the last 10 years; which has been stronger than private equity. That’s not to say all the LPs are going to switch their investments to private credit because that’s not realistic, but I do think an increased exposure on a relative basis to private credit will increase returns and give more development-minded investors a greater degree of control over their outcomes.

Considering the diverse economies and industries within Africa, which sectors have shown a stronger affinity for mezzanine and private credit? What potential do you foresee for these financial instruments as catalysts for economic growth in Africa?

Within our own fund, the genesis behind our fund is that there has been quite profound fundamental shift in the financial sector ecosystem in Africa and that’s driven by a range of technologies which have enabled lower-income groups, small businesses, and micro-entrepreneurs to be included in the financial sector in a profitable and economically sustainable way. A lot of very interesting, dynamic businesses are taking a piece of a growing pie (and growing addressable market). This creates an opportunity to deploy additional capital in a profitable way. The mezzanine instrument is a very valuable piece in the puzzle for a number of businesses.?

To conclude, could you offer advice to entrepreneurs and investors considering mezzanine and private credit in their strategies? What key factors should they prioritise when incorporating these instruments into their financial plans?

First of all business owners and entrepreneurs, irrespective of the sector, should consider the capital they need to take their businesses and objectives as shareholders to the next level. They should start from a blank piece of paper and work out what’s best for their business. Then they should engage with the market and see if they can find support for the types of capital they need from sources of capital in the market.

Can you give us a perspective for investors who are thinking about mezzanine?

For investors who are considering including mezzanine or private credit in their overall private capital allocation, I think it's something that investors have to consider very seriously given some discrepancies in relative performance over the last ten years. It's not just about IRR's: private credit and mezzanine give Limited Partners a greater degree of control over the tenure of their investments and a greater certainty in terms of cash flow from an earlier stage in the fund life. What's more is the number of funds available in the market today offering mezzanine and private credit is much broader, so more developmentally minded investors can have quite a lot of choice in terms of how they allocate capital to best adhere to their developmental mandates.

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