With deal-making in Africa still in its nascent years, delivering a strong, profitable exits has been a challenge for most players. Zain Latif, Founder and Principal at TLG Capital offers insight on how his firm has managed to beat the odds by delivering 22 positive small-cap exits since inception. TLG Capital has time after time won the Credit Investor of the Year accolade at the Private Equity Africa Awards.
Africa is the youngest continent, coming in at an average age of 20 years. This is in stark contrast to 43 years in Europe. With such strong demographics, bolstered by accelerated technology adoption and improvements in infrastructure, Africa can and should generate exceptional financial returns alongside developmental growth.
However, the complexities of developing local expertise, breaking the poverty trap, bridging local legal systems, project monitoring, scaling, liquidity, and technical know-how create hurdles to this potential. This is just to name a few of the hurdles.
Coronavirus disease (COVID-19), the war in Ukraine, and global economic conditions have further complicated the picture, creating a credit crunch for many small-cap companies. As such, the engines of growth that buoy companies in most developed countries are, for the most part, missing in sub-Saharan Africa.
TLG’s mandate is to fill this gap, cater to the ‘missing middle’, and generate commercial returns with a social impact in some of the poorest and least-invested countries globally. Founded over a decade ago, we have, over time, developed a nuanced strategy that significantly outperforms historic African private equity returns, at relatively lower levels of risk. Key to this strategy is the realisation that timing and achieving exits are the most difficult aspects of investing in Africa, due to the nascent nature of the market and lack of liquidity.
Focusing on deal structures in the form of senior secured debt with embedded equity upsides has been crucial. This has allowed TLG to achieve 35 deals and 22 positive exits to date. TLG’s deals all aim to have layers of downside protection that are as uncorrelated as possible with the underlying investee company. These include bank guarantees and standby letters of credit from well-capitalised banks. We also focus on credit insurance, liquid pools of collateral, receivables from strong multinational corporations, and developed market properties.
TLG’s overarching impact thesis is that funding small caps in Africa is key to economic growth. Indeed, the very fact that they are underfunded is what creates interesting commercial opportunities, meaning that the commercial and impact thesis at TLG is very much intertwined. TLG believes that investing sustainably and showing consistent returns is crucial, as that is what will attract more much-needed capital to the continent.