Private Debt Solutions: Empowering Economic Growth
Private equity solutions bridges the gap for South African SMMEs, driving economic growth and creating jobs. Learn about benefits for businesses and investors.
Private equity solutions bridges the gap for South African SMMEs, driving economic growth and creating jobs. Learn about benefits for businesses and investors.
Private debt? A solution to South African unemployment and economic growth
At the 2nd National Presidential SMME and Cooperative Awards, President Cyril Ramaphosa stated that “Focusing on Small, Medium and Micro Enterprises and cooperatives can trigger growth, create jobs and build a more inclusive economy,”. According to the International Finance Corporation, SMMEs within South Africa provide an estimated 50-60% of all employment opportunities and contribute approximately 34% to the GDP.
The Role of SMMEs in Economic Growth
Small, Medium, and Micro Enterprises (SMMEs) have played a crucial role in democratising the labour market and driving inclusive economic growth. However, South African SMMEs have faced significant economic challenges since the onset of COVID-19, struggling to expand and grow. With an estimated 2.4 million SMMEs in South Africa, these enterprises often need help to secure the necessary funding to achieve their business objectives. In this context, private debt funds could play a significant role in stimulating economic growth by bridging the funding gap experienced by SMMEs.
What is Private Debt?
Private debt (or direct lending) funds are non-bank lenders that provide loans to support the financing needs of businesses that traditional banks typically would not fund. Like banks, private debt funds extend loans and Borrowers are obligated to fulfil certain terms and conditions over the debt term. However, unlike banks, these funds can offer flexibility, shorter lead times, and niche expertise that SMMEs need when accessing debt to support their unique business requirements. The question then arises: why are our banks not funding SMMEs?
Why Are Banks Reluctant to Fund SMMEs?
The reluctance of banks to lend to SMMEs can be attributed to cost-benefit considerations. For example, if an entrepreneur seeks a business loan ranging from R1 million to R20 million, the costs and time involved in processing such loans render them relatively unprofitable for banks.
According to recent Bloomberg data, the global private debt market has grown by over 12% annually, reaching approximately $1.6 trillion in assets under management. There are several reasons for this trend.
The Growing Importance of Private Debt Solutions
A significant driver behind the proliferation of private debt was the introduction of new Basel banking rules in 2008. These regulations-imposed constraints on banks makes it less economically viable for them to lend to SMMEs. This growth reflects a broader trend towards alternative lending solutions that can offer more flexible and tailored financing options for businesses.
Bridging the funding Gap
Private debt funds can help bridge the funding gap by channelling much-needed credit to the mid-market, which serves as the engine of growth in South Africa. Addressing this funding gap will create employment opportunities and contribute significantly to the broader economy.
Case Study: Sasfin RBN Enhanced Jobs Fund
The "Sasfin RBN Enhanced Jobs Fund" exemplifies the significant impact private debt funds can have. By financing a new packing line for an agricultural business, the fund enabled the company to meet both current and future production demands. This expansion is projected to create 200 seasonal jobs, showcasing the positive ripple effects such investments can have on our economy. Stories like these highlight the vital role private debt funds play in driving growth and creating employment opportunities.
Benefits for Investors
Additionally, private debt funds benefit investors. South African investors’ appetite for private debt and equity is increasing, which can be partly due to the lack of opportunities on the Johannesburg Stock Exchange (JSE), which has seen over four hundred companies delist in the past two decades. Private debt offers the potential for higher current income and returns compared to below investment-grade fixed-income alternatives, leveraging the illiquidity premium or the excess return potential from investing in assets that cannot be easily converted to cash.
Conclusion: The future of Private Debt in South Africa
Looking ahead, the future of private debt in South Africa appears promising. With ongoing regulatory support and growing success stories, private debt funds are well-positioned to play a pivotal role in fostering economic resilience and growth. Sasfin Private Equity investment philosophy is to proactively assist with and drive strategy design and execution, with a measure of active involvement in the business.
