Private debt funds – Capable of bridging financing gaps in Nigeria – Experts

Some financial experts interviewed by Nairametrics have stated that Private Debt Funds, also called Private Credit Funds internationally, can bridge the financing gap existing in Nigeria amongst mid-sized and Private equity-backed companies by offering more cost-effective and suitable debt investments.

According to these experts, unlike Private Equity Funds, where investors seek ownership and control of the portfolio companies while aiming for significant capital appreciation, Private Debt Funds focus primarily on the investee company’s capacity to repay the debt, suitability of the debt structure to the operational dynamics of the company as well as the quality and ease of realisation of pledged collateral.

Low level of awareness about Private Debt as an asset class under Alternative Assets and the non-existence of Private Debt Funds managed by indigenous Fund Managers have been identified by these experts as some of the major challenges facing the adoption and growth of this attractive asset class in Nigeria.

Professor Uche Uwaleke, President of the Association of Capital Market Academics of Nigeria (ACMAN), speaking to Nairametrics exclusively, stated that Private Debt Funds as alternative investment/financing vehicles are still in their early stages in some Emerging Markets like Nigeria and other African countries compared with the activities of these Funds in established markets such as United States (US) and Europe.

In Nigeria, while there are Private Equity Funds, Infrastructure Funds, and REITs, local currency Private Debt Funds have not been available to Qualified Institutional Investors (QII) and High Networth Individuals (HNIs) as well as mid-sized companies.

This is changing, as FCMB Asset Management Limited (FCMBAM) has established the FCMB-TLG Private Debt Fund, Nigeria’s first Naira-denominated Private Debt Fund. The Fund, approved by the Securities and Exchange Commission (SEC) in May 2024, is sponsored and managed by FCMBAM as Fund Manager with technical support from TLG Capital Investments Limited (TLG Capital), United Kingdom.

The FCMB-TLG Private Debt Fund seeks to raise capital from Qualified Institutional Investors (QIIs) such as Pension Fund Administrators (PFAs), Insurance companies, Development Finance Institutions (DFIs), Family Offices, and Corporate Organisations, as well as HNIs and deploy such capital as corporate debt to companies with commercially viable but impact-oriented activities in sectors of the Nigerian economy aligned with the United Nations (UN) Sustainable Development Goals (SDGs).  The Fund will invest in the debt components of the capital structure of organisations and Special Purpose Vehicles (SPVs) in sectors crucial to Nigeria’s economic growth and development, including Agriculture, Healthcare, Education, Clean Energy, Transportation/Logistics, and IT/Technology.

Speaking at the signing ceremony for the Fund, James Ilori, the Chief Executive Officer of FCMBAM, said, “The FCMB-TLG Private Debt Fund opens a new avenue for professional investors to participate in the growth of key sectors of the Nigerian economy while providing essential capital to organisations driving sustainable economic growth and development in Nigeria”.

Professor Uwaleke further stated that despite being in its nascent stage, the potential for Private Debt Funds in Nigeria is substantial due to the significant funding gap exacerbated by the high cost of lending by traditional lenders. “In Nigeria, private sector credit is predominantly directed towards large corporate organisations, leaving SMEs and mid-sized companies underserved. Private Debt Funds can bridge this gap by offering more suitable and cost-effective financing solutions tailored to the specific needs of these organisations.  Also, unlike Private Equity Funds, Private Debt Funds require less extensive due diligence, making them an attractive Alternative Asset class,” he said.

Former President of the Chartered Institute of Stockbrokers (CIS), Mr. Olatunde Amolegbe, stated that Private Debt investments are valuable alternatives to loan facilities provided by traditional lenders. According to him, Private Debt Funds derive value from their ability to identify, support, and finance companies through suitable debt initiatives. “By providing not only financial support but also expertise and managerial know-how aimed at ensuring efficient management of the facilities, these Funds enhance the chances of success for the companies they invest in, ensuring the repayment of debt and interest as the companies prosper”, he said.

Amolegbe emphasised that Private Debt Funds are significant additions to the financial ecosystem.

What you should know

The FCMB-TLG Private Debt Fund is Nigeria’s first Naira-denominated Private Debt Fund.

The Fund, which is approved by the Securities and Exchange Commission (SEC), is also sponsored and managed by FCMB Asset Management Limited (FCMBAM) as the Fund Manager, with technical support from TLG Capital Investments Limited (TLG Capital), United Kingdom.

FCMB-TLG Private Debt Fund Series 1 Offer opened on Monday, June 24, 2024, as the Fund Manager, FCMBAM, seeks to raise Ten Billion Naira (N10 billion) under Series 1 of its One Hundred Billion Naira (N100 billion) Programme size.

Private Debt/Credit is a form of alternative credit in which debt investments are privately negotiated between a debt provider and an investee company without a financial intermediary such as a bank.

Investee companies for Private Debt are typically mid-sized companies that prefer to deal directly with debt providers rather than public markets or traditional lenders due to speed, cost efficiency, convenience, confidentiality or other reasons. Most Private Debt investments fall under the senior loan category, so debt providers are given repayment preference in case of default.

Private Debt has gained traction in the past decade and is one of the fastest-growing asset classes in the highly attractive Alternative Assets market. In the developed markets, this asset class has gained favour among non-conventional lenders, particularly following the global financial crisis in 2008 and the subsequent tightening of banking regulations.

According to an IFC report, Private Debt Assets Under Management (AUM) marked an 8-fold increase, from US$ 271bn in 2009 to over US$ 2.1tn in 2023.  Also, CSL Research, in its report titled “Private Credit: Emerging Asset Class in Nigeria and across Africa”, stated that Private Debt/Credit is set to become the fastest-growing asset class over 2021-26, with AUM expected to reach US$2.69tn, growing at a CAGR of 17.4%. As a percentage of global Alternative AUM, Private Credit is expected to expand to 12% in 2026 from 9% in 2021.

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