Mezzanine finance – that space between debt and equity that can be more flexible than pure debt and less dilutive than ordinary equity – is increasingly being used as a tool for growth in Africa, according to Anne Keppler, the German Investment and Development Corporation (DEG) Vice President for Equity and Mezzanine in Africa.
DEG is a subsidiary of KfW Bankengruppe, the large-sized German government-owned promotional bank , and is charged with investing exclusively in private sector growth in emerging markets.
With a global portfolio of €8 billion and over 600 clients, nearly a quarter of DEG’s money is invested in Africa. They have a portfolio of about €2 billion invested in 28 countries on the continent — €900 million of that is in equity and mezzanine, with about €400 million specifically in mezzanine.
In a recent interview, Keppler, who is based in Johannesburg, explained to OnFrontiers how mezzanine finance is fueling expansion in the region.
What is your elevator pitch for mezzanine finance on the continent?
DEG offers debt and equity funding– and everything `in between.’ And the ‘in between’ part is our mezzanine offering.
It can reach from a debt-mezzanine product, being as straight forward as an unsecure high-yielding loan, into a preference share that has different economic and voting rights from an ordinary share. So it is very flexible to reflect the client’s requirements. There is not the ‘one’ mezzanine product.
How is mezzanine financing unique in the African context?
One basic difference for Africa compared to other regions is that we see mezzanine mainly as a funding solution for growth – not exclusively an element of financial engineering.
Africa has not yet developed such a strong leveraged buyout market like Europe or the U.S. So, when we’re talking about mezzanine in Africa, it is not necessarily linked to a buy-out scenario per se. There are exceptions, but in our context – we use mezzanine more as an instrument to support growth and an example of how DEG can add value.
It is also special because we meet a lot of family owned and controlled businesses across the continent. The separation between ownership and management is not as strong as it might be in other markets. And you see a lot of families who retain ownership and are not seeking succession plays.
It makes mezzanine an interesting instrument on the yield curve especially if you are in an expansion mode where you might be below the profitability line.
But it is also very interesting element for companies seeking expansion without giving up ownership. You can literally be partners for a limited period of time. Redeemable structures mitigate the challenge of creating an exit nor do the existing shareholders and owners of the business have to adjust to someone else.
I think that’s where long-term and patient capital, which we can provide as a development finance institution (DFI), is very important and attractive.
What do you look for in potential clients?
The main element we are always looking for are established, profitable businesses with stable management who are at the next stage of their development and want to expand by adding a production line or enter into a new market and build on what they’ve already achieved. This gives us, usually, existing cash flows where a mezzanine product is very interesting.
DEG can offer 50+ years’ experience on the continent. And having a client portfolio of over 600 clients globally gives us access to a huge range of experience and knowledge. We tailor each opportunity individually, which may take time but we prefer to be diligent because we are not ‘one size fits all.’
That is especially important in the mezzanine space when we consider the current stage of the business. What is the business plan going forward? When and how much money do we need in order to grow the business?
That makes us very specific and individual. And through that process we explain what we mean with ‘mezzanine.’ What are the implications? What do the specific offering of terms bring to the business? How much does it essentially cost you? And how do you compare it?
Often mezzanine is kind of put aside with the comment – ‘oh that’s just expensive debt.’ But we rather try to say, it’s less dilutive equity.