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, Small, Medium and Micro Enterprises (SMMEs) in South Africa provide an estimated 50-60% of all employment opportunities and contribute approximately 34% to the GDP.
SMMEs have played a crucial role in democratizing the labor 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.
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.
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The question then arises: why are our banks not funding 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 ZAR1 million to ZAR20 million ($54,848 to $1.09 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.
A significant driver behind the proliferation of private debt was the introduction of Basel banking rules in 2008. These ‘regulation-imposed constraints’ on banks make 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.
Private debt funds can help bridge the funding gap by channeling 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.
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 that 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.
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 400 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.
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.
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