Private debt will balance the private equity portfolio asset class

Private equity firms looking to improve the quality of their portfolio should consider private debt in their portfolio asset class. It is well documented that the private equity and venture capital sector has been struggling with navigating over-valued companies, partially enabled by an exponential increase in private equity and venture capital firms. A more blended funding structure has the ability to drive a sensible discussion between the investor and the investee. The key challenge with plain equity is the risk of over-valuation, however, once blended with private debt the valuation quickly becomes more realistic in terms of EBITDA and enterprise value. The valuation essentially converges to a more symbiotic relationship with cash flows.

Private debt is an asset class that will ensure that private equity firms have strong balance sheets that can withstand the cycles of equity investments while providing a consistent return to investors. Private debt is a less risky asset class as it generates cash flows consistently over the investment period as compared to a more illiquid equity asset class. The structure attracts more investors (or Limited Partners) to invest in larger funds as compared to the current investment appetite in Africa. Private Debt is typically provided to companies on a bilateral negotiated basis outside of traditional banks and takes various legal forms including loans, mezzanine (“Mezz”) or preference shares (“Pref”).

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