GPCA: What were the key drivers for launching BluePeak? What did the private credit landscape in Africa look like when first launching the firm and how has it evolved since BluePeak’s founding?
Walid Cherif: We launched BluePeak in 2019 after spending over a decade in the Middle East at NBK Capital and Gulf Capital. Since the launch of our flagship fund, we have built a portfolio of eight investments and are launching a second fund. Africa presents a significant opportunity in terms of lack of financing. Banks tend to have a risk-averse lending approach. They primarily lend to governments and government-sponsored enterprises (GSEs) or large businesses with strong brand recognition. Capital markets are nascent and there are few private capital players besides growth equity investors. For BluePeak, it’s about filling that gap: financing growing SMEs that are looking for flexible capital solutions based on cash flows.
Private credit has expanded in Africa over the last five years, largely driven by development finance institutions (DFIs). BII, for instance, has developed a strategy and team dedicated to creating local private credit players and supporting fund managers as an LP. We have seen more first-time managers coming into the market, as well as established PE firms building out private credit strategies. Ultimately, there are still few players compared to the market appetite.
BluePeak closed its inaugural fund in 2023 at USD158m, receiving commitments from BII, FMO, SwedFund, AfDB, DFC, EIB, Sango Capital and others. For some of your LPs, this fund marks their first commitment to an African private credit strategy. What opportunities and challenges did LPs pinpoint while allocating to a new asset class?
When we were fundraising for our first fund, LPs struggled to understand why businesses would seek a private credit lender instead of bank financing. They often asked: “Is this distressed financing, are you a lender of last resort?” The AfDB estimates that there is a financing gap of over USD421b for African SMEs. Ultimately, these businesses become highly reliant on equity financing, or they go unfunded.
Some of the LPs that we approached five years ago had zero appetite for private credit, and they ended up coming in as LPs at our final close. For instance, we had several interactions with Sango Capital, and they would always say, “We only do equity.” Towards the final close they came back and said, “We have a small pocket available; can we still invest in the fund?” Now, they’re building the case for their next fund to have a bigger allocation to private credit.
We are also advancing conversations with family offices in the US, where their interest is impact investing with a good risk-reward equation. There, we emphasize that private credit lenders are not passive investors. We are impact-driven and focused on sustainability, while delivering downside protection.
BluePeak is a 2X Challenge Fund and a signatory of the Operating Principles for Impact Management. How is BluePeak utilizing an impact lens in its investments?
Many of the businesses that we have discussions with have an embedded impact, but they’re not doing it in a structured way. BluePeak identifies areas where they can turn this into intention-driven impact and facilitates ways that they can measure that impact.
With Africure, the pharmaceutical business we financed, we wanted to measure if more consumers were able to purchase affordable malaria drugs. We implemented a strategy with the management team that would ensure that Africure scaled up its manufacturing capacities while targeting key segments of the population. BluePeak’s financing was used to purchase raw materials and newer equipment to increase production at a lower cost.
BluePeak also structured an ESG-linked note for Prime Logistics, which operates in East and Central Africa. We developed a resource efficiency plan to reduce Prime’s GHG emissions and gave the company a reduction in the cost of financing as an incentive to reach interim targets. This has turned out to be the best performing action plan in the entire portfolio.
To date BluePeak has invested in eight companies. Looking forward, what sectors and geographies are most attractive to you? What structuring components are most crucial for you when lending?
We focus on traditional sectors such as manufacturing, telecommunications and financial services. Our borrowers must have sufficient track records and resilience to market cycles. We look at businesses that have a significant share of their revenue generated in foreign currency to mitigate the effects of FX volatility. We invest in East, West and North Africa, and we primarily finance businesses that can scale regionally because they are less vulnerable to macroeconomic shocks.
We don’t invest in companies that have large amounts of leverage. Our target debt-to-EBITDA ratio is 3.5-4x, including our investment.
If there’s any structure that is a “must” for us, it’s cash interest. We make sure that it’s at least 50% of the targeted IRR for each investment, alongside the option for convertible debt. This is a good way to assess the ability of the business to generate cash, and any realized return is cash that is distributed back to our investors. Three years into the life of the fund, our DPI ratio is 0.25x, which is very healthy compared to other strategies.
BluePeak’s most recently announced investment was in Teyliom Finance, a financial services holding company in Côte d’Ivoire and Senegal, alongside Swedfund. Please describe the thesis and how you plan to grow the company.
Teyliom Finance is an established financial services platform that has a controlling stake in Bridge Bank Group, a commercial bank which provides SME financing and consumer digital banking. Teyliom Finance also owns an asset management company, a microfinance institution and a brokerage services company. Teyliom had raised several rounds of capital from DFIs but sought additional financing to increase Bridge Bank’s lending capacity without diluting the equity of the current shareholders.
BluePeak structured flexible financing to boost Teyliom’s equity and to support the bank’s market expansion; we brought in Swedfund as a co-investor to support Teyliom’s microfinance platform. The bank has since expanded into several markets in Francophone Africa and the financial services arm is now the fastest growing segment of the group.
How are you generating liquidity for your investors?
Our primary approach is repayment of cash flows, where (after a one-year grace period, for example) companies repay in regular installments over four years. These are contractual obligations, so we know exactly how much capital will be returned to us and when. There are also situations when the company outperforms the base case and pays back the loan earlier than planned, or gets additional capital from an outside investor, or decides to sell an asset, or raises additional equity via a public listing. In those liquidity events, we’re happy to exit earlier. We negotiate a minimum money multiple, which is similar to a non-payment or an early prepayment penalty, to be 1.4-1.5x the original capital. This is three years’ worth of returns if you’re expecting 15-16%.