RPCK’s Heather Eisenlord discusses how impact investors are increasingly turning to private debt as a way to mobilize capital to health care facilities, providers, and suppliers.
Ever since the COVID-19 pandemic broke, impact investors have sought ways to mobilize capital to those on the front lines of the pandemic, and increasingly, private debt is a tool that they have utilized to get capital flowing to health care facilities, providers, and suppliers.
This is the first of a two-part series that explores how investors have used innovative debt transactions to finance the delivery of critical health services and supplies in countries across East and West Africa during the pandemic. This article explores broadly why private debt can be a highly effective tool for investors looking to unlock value in Africa. In the second installment of this series, I will consider two different recent deals that demonstrate how debt can provide investors with flexibility and speed to address urgent challenges while also providing a financing solution that is friendly and affordable for borrowers. What’s more, each of the transactions were built to overcome a number of fairly typical challenges investors and social enterprises encounter when putting together debt deals across much of the continent.
By way of background, over the past few years impact investing in Africa has emerged as one of the most active and exciting areas for investors. In 2020 alone, RPCK advised clients on several transactions across a variety of sectors and in several countries.
For the uninitiated to doing deals in Africa, it’s important to appreciate that you can’t paint the continent with one brush. Africa comprises over fifty countries that are in various stages of economic development, and that have distinct legal and regulatory systems that may make it easier or harder for foreigners to invest. Because of the complex economic, political, legal, and cultural differences across various countries and regions on the continent, investors need to bring a tailored approach to potential investments that accounts for the particularities of the country and the industry in which they are working.
Why Private Debt Can Be A Funding Mechanism of Choice to Unlock Value in Africa
Debt finance offers investors a great way to unlock value in small-to medium-sized enterprises (SMEs) by offering affordable and flexible capital that is necessary for organizational growth, as opposed to venture capital-style investment, which can be too expensive for early-stage businesses while also diluting founder equity.
Debt also provides advantages for investors seeking predicable returns on investment while looking to minimize the risk associated with equity. For investors looking to generate positive social and environmental impact alongside financial return, one useful model is to make debt capital available to mission-oriented SMEs on a rapid, short-to medium-term basis. Companies can use this capital to fill cyclical cash flow gaps that might otherwise stifle impact-producing operations, to finance increased operations, and, ideally, to provide a bridge to longer-term debt or equity investment, which is critical for growth-stage social enterprises.
This model holds true for SMEs in both highly developed and emerging markets. For instance, Open Road Alliance—a mission-driven lender with significant experience operating in Africa—provides short-term debt capital to SMEs facing revenue or financing roadblocks to help them keep operations (and, in turn, impact) on track, which can help these organizations secure the longer-term investment they need for sustainable growth and success.
Despite these benefits, short-and medium-term debt has historically been underutilized as an impact investment tool in certain emerging markets. In Africa, specifically, the financial markets in many countries are often less developed, making it harder for lenders to underwrite deals, whether due to a lack of data and transparency regarding debt markets in those countries or the fact that borrowers who might be creditworthy lack credit scores and a repayment record.
These and other factors may create actual—or often, perceived—risks for potential investors, which may dissuade investors from using debt, or may drive up the cost of capital for debt so that it becomes prohibitively high for the SME. However, impact investors willing to address and overcome actual or perceived risks may help prove a debt finance model, which may help lower the cost of capital for borrowers over time and help the sector take root and thrive.
RPCK leverages its expertise in debt finance to open up new opportunities in the impact marketplace. We believe that more impact investors should familiarize themselves with how private debt can help capital continue to flow to essential organizations in times of crisis. In Part 2 of this series, I will look at how Lateral Capital is providing debt financing to help a social enterprise keep medical supplies flowing during COVID. I’ll also discuss how Malaria No More is leveraging private debt—in the form of credit support and recoverable grants — to expand the amount of financial resources available to private healthcare SMEs on the front-lines of the COVID pandemic in Africa to ensure that they can procure vital healthcare supplies and safely provide critical health services.
Heather’s practice focuses on domestic and cross-border debt financings and innovative impact investing transactions. She is based in RPCK’s New York office.