Applying Innovative Structures to: SME Lending in Africa

    An interview with Isha Doshi, Co-founder, TLG Capital

    The continent of Africa has the youngest population on Earth – coming in at an average age of 20. This stands in stark contrast to Europe’s average age of 43 years and even Asia’s 32 years. With the strongest demographics of any continent, accelerating technology adoption, and dramatic improvement in infrastructure, Africa is, can and should generate exceptional financial returns together with developmental growth. 

    However, the complexities of developing local expertise, breaking out of the poverty trap, bridging over local legal systems, project monitoring, scale, liquidity, risk and technical knowhow create hurdles to achieving this potential. Beyond these challenges, the COVID19 pandemic and the present global economic conditions have created a credit crunch where many small and medium sized enterprises (SMEs), the engines of growth in most developed countries, are further starved of capital across sub-Saharan Africa.  TLG’s mandate is to fill this gap – the “missing middle” – aiming to generate commercial returns with a social impact in some of the poorest, most under-invested countries on Earth.

    TLG Capital’s Vision

    TLG Capital is a private credit manager founded in 2009 to overcome these challenges and explore commercial as well as impact-driven investment opportunities across sub-Saharan Africa. The company was set up by Isha Doshi and her co-founder Zain Latif, alumni of Lehman Brothers and Goldman Sachs, respectively. 

    Both are specialised in structured financing, an expertise they have applied over the past decade, working with various SMEs across the continent. “One of the problems in Africa is that credit deployed to the private sector only represents only 38% of GDP, on average, much less than in OECD countries,” says Isaac Marshall, Investment Manager at TLG Capital.

    “TLG’s overarching impact thesis since our inception over a decade ago is that funding SMEs in Africa is a key pathway to prosperity. Of course, the very fact that they are under-funded is also what creates interesting commercial opportunities. The commercial and impact thesis at TLG is very much intertwined,” concludes Doshi, who is also TLG Capital’s CFO.

    The Goldilocks Investor

    Doshi and Latif started TLG Capital as a small operation that they could use to tap into investment opportunities in Africa, which seemed to be just the right size. They had commercial potential but were too small for large banks to fund, and too large for micro-finance to address. “We were seeing commercially appealing deals with high developmental and sustainability impact but that remained unfunded,” Doshi explains.

    Addressing this gap requires specialised knowledge. “Sustainable investment starts with a sustainable lending structure. Financing needs to be tailored to the cash-flow generating capacity of the investee company, the business’ growth plans and the securities and collateral that the company can provide. A partner like TLG Capital has the open mind and expertise to engage with entrepreneurs on all these fronts,” says Amanda Kabagambe, Partner and Head of East Africa at TLG Capital.

    SME Investing in the SDGs 

    • TLG Capital focuses on five Sustainable Development Goals (SDGs): 
    • No Poverty (SDG 1)
    • Good Health and Well-Being (SDG 3
    • Gender Equality (SDG 5)
    • Decent Work and Economic Growth (SDG 8)
    • Industry, Innovation and Infrastructure (SDG 9).

    “We focus on SMEs across sub-Saharan Africa operating in the healthcare, financial inclusion and consumer goods sectors. We are also very focused on financing women-led businesses and companies that benefit women through their products and services. The ESG process takes place in parallel with financial and commercial analysis and we map how our prospective companies contribute to any of these five SDGs,” Doshi explains.

    Isha Doshi, Co-founder, TLG Capital

    “Our first investment was an AIDS and malaria drugs manufacturer in Uganda, Quality Chemicals. It is a world class WHO-accredited pharmaceutical manufacturing plant which is now expanding its offering to include oncology and sickle-cell treatment among others. TLG was the first private investor into the company. The company started a joint venture with Indian drug maker Cipla to create a pharmaceutical manufacturing facility in Uganda (CiplaQCIL). Other early investments in the TLG story include a Ghanaian cancer treatment facility, a healthcare clinic in Liberia, a bank in Zimbabwe and an agricultural project in Southern Africa. More recently we have backed mobile banks for the unbanked, equipped pharmacies with digital delivery services, and built bus stops and public toilets in Nigeria.” Doshi adds. 

    Another company, TLG Pharma also supplied high quality face masks to hospitals in Benin & Togo to help protect healthcare workers on the frontlines during the COVID19 pandemic, distributing 284 million essential medications since TLG’s 2018 investment. On the FinTech front, in 2021 TLG Capital invested in FairMoney, a mobile bank for the 60% of Nigerians without a bank account.

    The Challenges of Private Equity in sub-Saharan Africa

    “None of our motivations or goals have changed over the last decade. However, we have certainly learned a lot and these lessons are reflected in changes we have made to our deal structures. Being a private equity investor in sub-Saharan Africa is often a difficult proposition. Nascent capital markets and the lack of buyers make exits difficult, cash flows via dividends can be limited, and currency depreciation often erodes returns. It is also difficult to embed real exercisable rights into minority equity positions,” Doshi says.

    Timing and achieving exits are the most difficult aspect. “As asset managers, we make a commitment to our investors to exit by a specific time. It is very hard to exit private minority equity positions in sub-Saharan Africa due to lack liquidity. Only one of the companies we have invested in to date has managed to achieve an Initial Public Offering (IPO). And even when a company is listed, local stock exchanges are thinly traded so real liquidity and sensible pricing is often times not achieved,” Doshi continues.

    Private Debt with Equity Upside and Downside Protection

    “These hurdles made self-liquidating instruments , such as debt, more appealing than equity, particularly as we are still able to structure equity upsides into our investments and take board seats, which simultaneously allows us to play a private equity-like active role in shaping and monitoring companies,” Doshi explains.

    “Private credit US Dollar investments with anywhere from 10-16% returns are relatively common in our pipeline, with some deals coming in much higher if equity upsides are achieved. This beats historic African private equity returns, while achieving a lower level of risk. Being a senior credit investor ensures we are higher up the capital structure in the event the company runs into trouble. This, combined with our policy of protecting our downside in each investment with realizable collateral or uncorrelated layers of protection, has helped us achieve a consistent level of exits with positive returns to date. Downside protections include SWIFT bank guarantees and insurance wraps while realizable collateral include liquid securities which the company or entrepreneur may be able to ring-fence or receivables from well-known multi-national corporations which are pledged to us,” Doshi continues.

    Amanda Kabagambe, Partner and Head of East Africa, TLG Capital

    “Fast-growing African companies often don’t fit the capacity of local commercial banks to provide credit. Banks could be unwilling to provide credit due to the company’s idiosyncratic or sector risk or because it simply lacks the financing solutions necessary, including in terms of asset financing or working capital loans,” Kabagambe adds.

    Combining Structured Finance Expertise with Impact

    Faced with this opportunity, TLG Capital’s structuring expertise is its edge. “We are one of only a few investors doing structured credit in African markets. This allows us to tap into a risk profile that is lower than equity and which also brings down SMEs’ cost of financing. We’ve done 30 deals with 19 exits to date and we’ve seen several workouts, where the company has defaulted but TLG still succeeded in exiting with a positive return. This is important from an impact perspective as well as a commercial one. Successful exits and positive returns will attract further investment to the continent and help recycle capital into other high impact businesses. 

    Because impact is at our core, we work with entrepreneurs to ensure they have the support they need through difficult times,” Marshall argues. 

    TLG’s structuring expertise allows it to provide a layered investment. Kabagambe illustrates a recent experience as an example. “Consider a company that wins a contract to provide a new service but needs a US$5 million 5-year loan to finance this expansion. Despite owning US$7 million in property to supply as collateral, the business receives unviable quotes of 19% interest with 1 to 2-year maturity from local banks. Because African banks have difficulty providing long-term capital, it can be difficult for them to finance long term loans even if collateral is adequate and the business is viable. This is an opportunity for credit funds with longer term capital,” Kabagambe explains. 

    Partnership with Swedfund

    TLG Capital’s structuring expertise is not the only front on which it can help its investee companies. “Sustainable investment can often be made better if investee companies can be supported from time to time with one-off ‘boosts’ – whether this be in technology, training or during a difficult time (for example, the pandemic). Success can hinge on a partner that understands what it takes to build a company, particularly in markets which remain under-developed. One-off consultancy and advice services which consider and provide funding around factors such as technology, logistics, environmental protection or gender inclusivity should not be under-estimated,” Kabagambe argues.

    Isaac Marshall, Investment Manager, TLG Capital

    For TLG Capital, Swedfund has been that partner as well as a significant external investor since 2018. “Swedfund gave us the opportunity to showcase our experience and track-record to a more institutional investor audience interested in both financial returns and impact. We have been able to engage with them on issues such as climate change, gender equality and active monitoring of impact metrics. They have been extremely forthcoming in providing tailored assistance to our investee companies,” Doshi adds.

    “We have worked with Swedfund’s technical assistance team to install solar panels and digitize patient records in our healthcare clinics in Liberia, fund ultrasound equipment related to maternal health in our pharmacies and GP surgeries in Nigeria and provide protective equipment to our healthcare investees during the pandemic. Swedfund has helped us with ESG advice and impact monitoring and process considerations, even providing training for the TLG team to ensure it was consistently and intentionally building impact and gender lens into the investment process from pipeline stage through to exit,” Doshi concludes.


    TLG Capital

    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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