Private debt begins to shine in SA

After over nearly 30 years of providing private debt solutions, Futuregrowth has recently witnessed an unprecedented surge in activity - both from businesses seeking capital and from investors eager to understand the risks and opportunities within the private debt space. 

The growth of private debt, playing out globally and in South Africa on a smaller scale, is being driven by two key forces: on one side, investors such as pension and endowment funds seeking attractive risk-adjusted returns; and on the other, businesses turning to private debt as an alternative to traditional banking channels. 

On the investor side, there’s growing recognition that private debt has a proven track record of delivering stable, risk-adjusted returns with low volatility. Contrary to the previously held misconception that private debt primarily funds high-risk borrowers, the data shows otherwise, and investors have recognised this. Investors have come to understand that low volatility is driven by lending to stable, well-established borrowers. This stability, combined with private debt’s ability to structure funding solutions that are better suited to an individual business’s needs, has strengthened its appeal. 

As banks face increasingly restrictive lending criteria due to regulations like Basel III, private debt has emerged as a viable alternative for businesses seeking capital. Additionally, traditional capital market solutions are often costly to implement and maintain - making them accessible primarily to larger businesses. This leaves small to mid-sized businesses underserved, and many are now turning to private debt as an attractive funding avenue. 

In the mid-cap space especially, funding needs are becoming more complex and sophisticated, requiring bespoke solutions compared to those offered by traditional financial institutions, which are often focused on standardised, "vanilla" lending. In contrast, private debt providers, with their smaller, more agile teams and funding structures, are well-positioned to deliver tailored, flexible financing structures. 

A funding tool for growth

While the shift towards private debt as a viable lending platform is already well-established globally, it is now gaining meaningful traction in South Africa - though at a more gradual pace. For the local private debt industry, this presents a unique opportunity.

With the country’s complex market conditions, including rising costs and regulatory challenges, private debt could play a pivotal role in enabling growth for businesses that would otherwise be underserved.  With a growing number of small and mid-sized businesses seeking capital, private debt offers the flexible, nimble solutions that these potential borrowers need.  

Recent political shifts, including the formation of the Government of National Unity, and the recent reversal of the VAT increase, have reignited market confidence in South Africa's economic prospects and institutional strength. This optimism, coupled with declining interest rates, has led businesses to consider expansion and capital expenditure. 

The property sector (especially affordable housing and student accommodation) remains a key area for private debt investment. South Africa continues to face an undersupply of these essential resources, and private debt can bridge the funding gap.

Furthermore, government efforts to crowd private sector participation into infrastructure projects - such as railway networks, water and electricity transmission - are likely to create a pipeline of attractive investment opportunities for private debt investors.

The success of these initiatives is best showcased by the Renewable Energy Independent Power Producer Procurement Programme. Government’s clear and transparent regulatory framework combined with the necessary credit enhancements has played a pivotal role in driving private capital into much-needed infrastructure projects.

Additionally, the country’s digital infrastructure will need to be strengthened to accommodate the rapid expansion of Artificial Intelligence, creating a ripe opportunity for private debt investors to fund tech-driven initiatives. 

To capitalise on these trends, South Africa's private debt players must prioritise three key strategies. First, education is essential. Understanding the intricacies of the markets into which it invests, as well as the risks and rewards it entails, is critical to making informed investment decisions.  

Second, relationship-building with key industry players is vital to ensure that when transactions arise, private debt firms are well positioned to invest in these transactions. To achieve this, private debt firms need deep-rooted networks which have been formed over a number of years of actively participating in the private debt market.  

Finally, diversification through appropriately sizing investments and industry exposures in a portfolio context together with disciplined monitoring is key to managing risk. By ensuring a well-diversified portfolio with limited contagion risk and close monitoring of the assets, private debt firms can mitigate potential losses and build resilience to counter inevitable market turbulence. 

The outlook for private debt in South Africa is undoubtedly positive. While the local market may have been slow to catch up with global trends, the shift from traditional banking to private debt is inevitable. As businesses and investors alike recognise the value of flexible, bespoke funding solutions, the demand for private debt will continue to grow.  

Read: Getting to know Iqeraam Petersen, Head of Private Debt