Gearing up for the private debt market expansion in Nigeria

BY ANTHONY IZUAGIE

Aggressive image making and enactment of new policies, such as the Tax Reform Act of 2025, are yet to improve foreign direct investment, which plunged from $2.39 billion in 2020 to $1.87 billion in 2023. Data released for Q1 2025 indicates that foreign investors prefer Foreign Portfolio Investment (FPI) to Foreign Direct Investment (FDI). Local businesses, being pillars of economic growth, will continue searching for finance domestically for expansion and growth. Approximately 39 million MSMEs contribute 46.32% to the GDP and 89% of local employment, according to SMEDAN. All over the world, MSMEs are strategic to economic growth.

Several reports on MSMEs still point to a lack of finance and infrastructural development as major challenges facing Nigerian SMEs. Bank loans, which are easily accessible to MSMEs through business accounts opened with the banks, outweigh other sources of MSME financing. According to the PWC Nigeria MSME survey 2024, private sector credit to MSME was 14.1% of GDP in 2022, compared to 35.8% for SSA. The International Finance Corporation (IFC) has raised concerns about the N13 trillion Naira deficit financing for small businesses, resulting from the scarcity of private finance in the form of either equity, debt, or both.

Complementing bank loans are private equity funds. From three private equity funds with Seventy-five Million Dollars ($75m) in assets under management (AUM) in 2003, the private equity market has grown to be a source of financing Nigerian businesses. Driven by investment opportunities and a commitment to delivering innovative and impactful products in real estate, financial services, and healthcare, PE firms have helped to increase business survival, often through their participation in value-added activities by engaging in the management of investee companies. Over 80 private equity firms with more than $300 billion in investments operate in Nigeria.

In an article released by CM Group Consulting titled “Private Equity Investment Trends in Nigeria,” what was striking about Nigeria was the resilient economy, the abundant investment opportunities, and the challenging exit for PE investors. The exit route through the stock exchange is developing. This development is partly due to the underutilisation of the secondary market for major PE exits.

Launching a private debt fund in Nigeria is a development long overdue. The arrival of FCMB-TLG private debt fund marks a turning point for the private credit market. Recalling the slow start to the growth of private equity firms in Nigeria, the announcement of FCMB’s private debt fund can attract new fund managers to the horizon. As domestic sources of financing for businesses increase with the launch of this fund, it would be worthwhile to understand how this would complement existing sources of MSME financing.

A survey of key markets in sub-Saharan Africa issued by fsdafrica and some of its partners in 2022 noted the slow growth of the African private debt market. It recognised the Nigerian Infrastructure Debt Fund and Stanbic IBTC Infrastructure Debt Fund as those operating in Nigeria at that time. Then, the challenges identified for private debt funds include a lack of market understanding, a lack of evidence of track records, and high earnings expectations.

Private debt sprang up in the United States in the late 1980s. The US market has more than $1.3 trillion in assets controlled by Private Credit Investment funds and Business Development Companies. South Africa has seen significant growth in the private debt market. Its popularity is driven by lower risk compared to equity and predictable cash flows.

Unlike private equity investors who are tied to a business by their controllable interest, private credit investors, or private debt funds, have a specified timeline defined in the loan agreement. Private debt funds don’t have to bother about an exit strategy. Dilution of ownership is a major concern for local entrepreneurs and attracts them to debt financing; private debt funds do not seek control of a borrower’s business. Ownership in the investee is a major difference between private debt and a private equity fund. Like commercial banks, private debt funds provide credit in the form of direct lending, mezzanine financing, distressed debt, or special situation loans. One unique feature of private debt is lending for needs not catered for by commercial Banks and other public lenders.

The involvement of private debt funds in reconfiguring Nigeria’s financial system is laudable. To ensure speedy growth, a robust credit system must be in place. The current credit system, challenged by a low credit culture, needs to be strengthened and supported.

The loan size for MSMEs is usually small, often ranging from N1,000,000 to N50,000,000; this may be below the value financed by private debt funds focused on large companies. Therefore, as new entrants are anticipated, we hope to see micro-sized private debt funds that can meet the SEC requirements to join the market and serve MSMEs. Importantly, government institutions such as the CAC and the FIRS can help connect MSMEs to the credit bureaus operating in Nigeria during their statutory filings or business registration process. This can genuinely help businesses to build their credit history from the date of incorporation.

Based on the experience of the private equity market in Nigeria, a significant amount of financing is expected to trickle in through private debt funds. All hands must be on deck to facilitate the growth of the private debt market.

Anthony Izuagie, a graduate student at Texas A&M International University, Texas, and a CFA candidate, can be contacted via [email protected]