I had a really interesting chat with Ryan Wood-Collier of Greenpoint Capital about the private credit market in South Africa.
While private credit has become a growing part of many local fixed income and multi-asset unit trusts, there are relatively few dedicated private credit managers in South Africa.
Greenpoint Capital CEO Ryan Wood-Collier says that he believes his firm is one of less than 10 in the country.
“By broad classification, private credit is a large and diverse asset class. But in South Africa there are only a few pure-play private credit funds — standalone managers who source and structure transactions on a truly bilateral basis,”
“Much of what is labelled as private credit locally would, in more developed markets, be viewed as being part of the broadly syndicated loan market — essentially loans structured by big banks portions of which are sold or syndicated to asset managers seeking credit exposure.
Returns on underlying investments can come through a combination of yield, an upfront fee, and a risk-based instrument with return linked to the overall performance of the company”
Wood-Collier says.
Greenpoint Capital strategy structures all of its investments internally. The fund has an AUM of around R3 billion and targets a return of around Jibar plus 7% after fees.
“Returns on underlying investments can come through a combination of yield, an upfront fee, and a risk-based instrument with return linked to the overall performance of the company,”
In his view, there are four skill sets on which private credit funds should be assessed: an ability to source and be selective when making investments; negotiating and structuring transactions with appropriate protections; constructing an appropriately diversified portfolio; and most importantly, managing individual investments over their life.
“Most funds can originate deals and demonstrate a fair investment process,” Wood-Collier says. “Fewer people can credibly structure a transaction with appropriate legal protections, and even fewer can demonstrate the ability to manage investments, particularly on the downside when something goes wrong.”
Assessing deals
In Greenpoint’s case, sourcing is a mix between inbound opportunities from corporate finance advisers and using their own network. Wood-Collier says that the firm will see around 300 transactions per year. Ultimately, however, they will only invest in about 10 of them.
This is largely a function of the process that Greenpoint goes through in assessing opportunities.
“The single most important thing in investing in private credit is the preservation of capital and avoiding or minimising principal loss,” Wood-Collier says. “It’s not about trying to find the one transaction that shoots the lights out.”
Greenpoint looks to lend to medium-sized business, with EBITDA of between R10 million and R300 million, with funding requirements of R20 million to R1 billion.
“We operate in a range of sectors, but do have exclusions like mining and property development. We don’t think high capex, commodity-driven sectors or highly operationally geared sectors suit private credit investments because underperformance can quickly result in a requirement for significant capital. If the equity holders aren’t willing to support that, you could have a problem.
We also don’t do property development because other players are better suited to it, and its outcomes are typically quite binary. We prefer situations with ongoing and predictable cash flows that can support the loan.”
Most of the businesses Greenpoint invest in are service-based, in areas such as business services, facilities management, financial services and media and advertising.
“Our portfolio currently has about 20 underlying companies,” Wood-Collier (pictured above) says. “A level of diversification is good, but too much diversification you end up diluting a lot of the return aspect, so you want some concentration.”
Importantly, Greenpoint negotiates and structures all these investments on a bilateral basis.
“The benefit of private credit is you can secure your position through both contractual rights but also tangible security,” Wood-Collier says. “We always try to ensure our loan is covered two times by some security metric, but then also have legal and structural protections that protect the rights of the investment, prevent the businesses from operating in a certain manner that could impact the credit risk, or result in value leakage from the company.”
Wood-Collier believes that the most critical skill for a private manager is, however, their ability to manage their investments once made.
“You need to have both the contractual rights and the skill set to be able to act when things deviate materially”
“A private equity manager will typically sit on the board, define strategy and drive growth or efficiencies in the company. Private credit is different in that you are primarily managing downside risk.
You are typically backing a strong management team and shareholder base to deliver a plan, and your capital is going into the business to facilitate that plan. The base thesis is the company will perform to the investment case, however you need to have both the contractual rights and the skill set to be able to act when things deviate materially.”
An important aspect of this is having a material degree of influence.
“We always want to have a position of significant influence or control over the investment. We typically hold 100% of the loan investment, but can and do invest alongside other lenders, but in these circumstances we are typically one in a club or two or three lenders. Our current strategy is not to invest in a broad syndicate of lenders, where we have limited or no influence.”
Appreciating risk
He adds that defaults are a reality in this space, and that has to be understood by investors.
“Private credit is not an alternative to a money market,” Wood-Collier says. “There needs to be an appreciation that there is risk. The manager, however, needs to have an ability to manage that risk.”
As it is a specialist fund with partial liquidity, the minimum investment into Greenpoint Capital’s private credit strategy is R5 million, and there is a 12-month notice period for redemptions.
About Ryan Wood-Collier
Ryan Wood-Collier joined Greenpoint as CEO in 2013, prior to which he spent 14 years in London in investment banking and private credit, primarily at British merchant bank, Close Brothers and US investment bank, Lincoln International. Ryan started his career at PwC in London focusing on Infrastructure M&A and is a CFA charterholder. Greenpoint Capital was awarded Specialist Manager of the year in 2022 by HedgeNews Africa.
By Patrick Cairns, Running Yield
