The International Finance Corporation (IFC) and the UK’s Foreign, Commonwealth & Development Office (FCDO) have partnered with a group of European development finance institutions, including Sweden’s Swedfund, Norway’s Norfund, and France’s Bpifrance, to invest $75 million in a new private credit fund that will support viable but distressed small and medium-sized enterprises (SMEs) throughout Africa.
TLG Capital, an investment firm based in London, is managing the TLG Africa Growth Impact Fund II (AGIF II), and this capital marks the fund’s first close.
IFC announced on April 29 that the fund, which aims to raise $200 million in total, is intended to fill a significant funding gap assailing African SMEs, especially those with difficult macroeconomic circumstances.
Challenges facing African SMEs
Nine out of 10 new jobs are created by African SMEs, which are the backbone of the continent’s economies and employ an estimated 80 percent of the workforce. Access to suitable and adaptable financing is still a major obstacle, though.
According to TLG Capital, recent global economic shocks, inflation, and currency volatility have made about one in four SME loans in Africa more vulnerable to stress.
Solutions offered by AGIF II
By offering customised, long-term debt financing, along with components of equity participation and, most importantly, guarantees from regional African banks, AGIF II offers a novel solution to this problem.
Because struggling businesses often find traditional bank financing to be too short-term or restrictive, TLG is able to offer loans with tenors and interest rates that are better suited to their recovery and sustainable growth needs.
Swedfund’s Senior Investment Manager, Jakob Larsson, emphasised the investment’s strategic significance: “To protect existing jobs and to create new ones is crucial for poverty reduction. For African SMEs to survive and grow, it is important that there is a functioning market with the right, fit-for-purpose financial services addressing diverse local challenges. Through this investment, we help achieving that, generating long-term impact.”
Building on an existing partnership with TLG Capital, Swedfund is investing $15 million in AGIF II.
Fund’s structure
The fund’s structure, which entails collaborating with African banks, is intended to take advantage of de-risk investments and local market expertise.
In addition to providing much-needed capital to companies that are already well-known to the local financial system but need a different kind of support, TLG hopes to increase the predictability of results for fund investors by requiring guarantees from partner banks.
By offering solutions for their stressed asset portfolios, this cooperative model also aims to support the domestic banking industry.
Areas of concentration of the funds
Investments from AGIF II will be concentrated on profitable SMEs in critical industries like manufacturing, healthcare, agriculture, and telecommunications.
The fund seeks to advance inclusive growth, gender equality, local ownership, and sustainable industrialisation with a specific focus on the UN’s least-developed nations and areas affected by conflict. The fund plans to provide operational and strategic advice in addition to capital.
The involvement of several European development finance organisations in addition to the IFC highlights a common dedication to supporting the growth of the private sector and the creation of jobs in Africa.
These organisations usually have mandates that support AGIF II’s declared goals by giving equal weight to monetary gains and quantifiable development impact.
Investor confidence in TLG’s approach and the possibility of making a significant investment in Africa’s SME sector is demonstrated by the $75 million first close, which was supported by the IFC through its Distressed Asset Recovery Program (DARP) with a commitment of up to $20 million.
It is anticipated that the fund’s effective implementation will give companies experiencing short-term difficulties a lifeline, allowing them to bounce back, keep and add jobs, and support the continent’s long-term growth and economic recovery.