Filling the Gap: The Emerging Role of Private Credit in Africa’s Financing Landscape

Private credit has emerged as a major force in global finance over the past decade, dominated by the US with the European market rapidly growing; 2024 estimates place the US market at $1.1 trillion, compared to $505 billion for Europe(1). With institutional investors seeking higher yields and portfolio diversification and with borrowers looking to raise flexible and tailored capital, private credit presents a mutually beneficial alternative to traditional bank financing. In Africa, where financing constraints persist across business sizes and sectors, private credit may help to unlock financing for sustainable economic growth.

Broadly, Africa’s financing needs remain vast and largely unmet, particularly in infrastructure and private sector development, both of which are essential drivers of long-term growth. In the latter category, this funding gap extends across the business spectrum, from Small and Medium-sized Enterprises (SMEs) to mid-cap and even large private businesses. The gap is becoming more poignant as lending and grant-providing countries increasingly turn inward to address domestic concerns, cutting off aid and loans(2). A key challenge for Africa is that access to credit, an essential component of the financing ecosystem, remains limited(3).

Africa’s SMEs are underfunded. Indeed, estimates put Africa’s SME financing gap at $331 billion(4). These businesses, important catalysts for regional trade, economic development and innovation, are often deprived of much needed capital due to, amongst other challenges, lack of collateral, short or no credit histories, and high levels of perceived risk. Mid-cap businesses are similarly constrained and often for the same reasons(5). While precise figures are harder to come by, market evidence suggests that Africa’s mid-cap companies are significantly underfinanced, with many relying on debt with inflexible terms, or missing growth opportunities altogether(6). 

Larger firms fare better, but they too face challenges in accessing long-term, tailored capital. According to one survey, large firms in sub-Saharan Africa secure more favourable loan terms compared to SMEs; however, even they encounter availability restraints(7).

Africa is not alone in facing challenging credit conditions. According to the International Financial Corporation (IFC), businesses in emerging markets and developing economies, more generally, are facing a credit contraction due to, inter alia, rising global interest rates, and limited risk appetite among lenders(8). For Africa, unlocking viable credit options could drive job creation, productivity, and sectoral transformation, leveraging its young, dynamic population as a key driver of the continent’s economic growth and development. 

Private credit, defined broadly as lending by non-bank and non-public investors, offers a compelling alternative to traditional bank financing. Similar to private equity, private credit is often offered through closed-end funds that require investors to make long-term capital commitments. Private credit lending structures include senior direct lending, mezzanine finance, subordinated or junior debt and revenue-based lending. Globally, including in Africa, the majority of private credit is provided in the form of senior direct lending(9). Mezzanine financing is the second most utilised structure in Africa but still trails well behind direct lending. 

Importantly, in contrast to traditional bank lending, private credit structures can be flexible and customized, an essential feature in African markets where one-size-fits-all financing often fails. In addition, private credit lenders typically have a higher risk tolerance than banks, offer greater structuring flexibility, and can execute deals more quickly.

That said, private credit does not come without trade-offs for borrowers. 

Private credit’s greater risk tolerance, flexibility and speed typically translates into higher borrowing costs. Private credit also tends to be illiquid, leading lenders to charge premiums(10). Private credit lenders may additionally impose more stringent loan terms than those typical of traditional finance. These terms may include tight security arrangements and covenants, and limitations on cash or earnings usage. Further, if funds are lent in non-local currency, the borrower must manage FX risks. 

Moreover, and more broadly, private credit transactions have raised structural concerns, including that they are associated with limited transparency and regulatory oversight as compared to traditional lending. Such structural challenges may expose investors and borrowers to increased risks, through, for example, riskier lending practices in the context of fewer prudential and legal protections. For borrowers, the lack of standardized disclosure can also create information asymmetries, making it difficult to assess whether financing terms are fair and competitive.

Investor interest in private credit in Africa is growing, albeit slowly and from a low base. An October 2024 African Business Magazine article remarked that, although global private credit assets under management (AUM) exceeded $1.7 trillion (more recent AUM figures for private credit have reached the $3 trillion range) in 2023 (11), only 0.3% of this amount was deployed in Africa,(12) illustrating the continent’s marginal position in global private credit flows. The same article further noted that private credit makes up a mere 7% of financing on the continent (13). 

But the tide may be turning. 

Private credit is expanding in Africa both in the number of transactions and in the number of market players. For example, British International Investment (BII), the UK government’s development finance institution, witnessed over 700% growth in such transactions between 2021 and 2022(14). 

Recent years have also seen the emergence of specialized African private credit funds, including those led by development finance institutions, impact investors, and increasingly, private equity managers diversifying into credit strategies. For example, Ninety One, an Anglo-South African asset manager has deployed more than $1.2 billion in more than 20 countries, focusing on infrastructure and telecoms, with half of its investments contributing to the UN Sustainable Development Goals (15). Similarly, BluePeak Private Capital, based in Luxembourg, has invested growth capital in African mid-sized companies in sectors such as healthcare, technology, and financial services(16). AfricInvest Private Credit, an African non-bank financial institution, offers CAPEX or working capital loans to African SMEs operating in a variety of sectors(17). Growth Investment Partners Ghana, based in Accra, provides long-term, flexible capital (primarily in local currency) to Ghanaian SMEs, investing in sectors such as infrastructure, manufacturing, healthcare, agribusiness, and financial services(18). Investors in these various funds include the African Development Bank, BII, FMO (the Dutch entrepreneurial development bank), IFC, Swedfund, and the Swiss Investment Fund for Emerging Markets(19, 20). 

Although the African private credit market is in its early stages, market players expect an accelerating trend on the demand side, in particular in light of today’s global environment(21). This coupled with more investors looking for high risk-adjusted returns, could lead to continued growth of the market. 

In short, in Africa, where the financing gap for businesses and infrastructure remains significant, private credit could serve as a potentially catalytic source of long-term, flexible capital that helps address the continent’s urgent financing needs. As one market participant put it, private credit ‘will play an important role in the African growth story in the coming decades.’(22)

Nicole Kearse is the Head of Sovereign Finance at the African Legal Support Facility.

Disclaimer: The views, positions and opinions expressed in this article are the author’s own and do not necessarily reflect the views, positions and opinions of any entities with whom she is, or may be, affiliated.