NAIROBI, Kenya, Aug 19 – Private debt is emerging as an alternative source of financing for Kenyan micro, small and medium enterprises (MSMEs), as businesses struggle with high borrowing costs, stringent collateral requirements and limited access to formal credit.
Teddy Yanga, Senior Investment Manager at Lofty-Corban Investments Limited, says private debt is gaining attention because it can provide businesses with more flexible financing structured around their cash flows and specific funding needs.
According to Yanga, Kenya’s MSME financing gap is estimated at approximately Sh4 trillion under the draft MSME Policy 2025, creating room for alternative financing models. He says private debt can help businesses with strong growth potential but limited assets to access capital.
“Private debt is gaining attention because it addresses a challenge many Kenyan businesses continue to face: access to timely and flexible financing,” Yanga says.
He adds that the financing model is particularly relevant as Kenya prioritises industrial growth, value addition and regional trade, which require businesses to access capital quickly to expand operations and take advantage of emerging opportunities.
What is private debt?
Yanga describes private debt, also known as private credit, as a loan provided directly to a company by an investor or private debt fund manager rather than through a traditional bank or public bond market.
“If a business has strong revenues, growth potential and strong profitability but lacks an asset to pledge as collateral, a traditional bank will likely say no, while a private debt lender takes a keen look at the business’s actual cash flows to make a decision,” he says.
He says the financing model can benefit businesses across different sectors, provided they meet a private debt fund’s evaluation criteria.
These include the potential of the sector, business growth prospects, profitability, cash-flow generation and compliance with financial and other specific covenants.
Private debt for investors
For investors, Yanga says private debt can provide an alternative to traditional fixed-income and equity investments.
He describes it as a bridge between lower-risk fixed-income investments, such as government bonds, and higher-risk growth assets such as publicly traded equities.
Private debt can provide investors with enhanced income through potentially higher yields than traditional fixed-income instruments such as Treasury bonds and investment-grade corporate bonds.
Yanga says private debt can also offer downside protection and capital preservation, particularly where the financing is structured as senior debt.
“Senior debt means debt holders are at the frontline to be repaid from the company’s assets or revenue streams if a borrower faces financial distress,” he explains.
Private debt can also provide diversification because these assets are not publicly traded and are therefore less directly exposed to day-to-day movements in public markets.
What businesses should consider
Yanga says businesses considering private debt should first determine whether the financing matches their borrowing requirements, financial position, growth prospects and risk tolerance.
The funding could be used for short-term requirements such as working capital or for longer-term needs such as business expansion.
Businesses should consider the cost of capital against the expected operational return, their ability to service the debt, the flexibility of repayment terms and whether the lender’s interests are aligned with their growth plans.
“Some of the key factors to consider would be the cost of capital versus the expected operational return, debt servicing ability, the customised debt terms, lender alignment and strategic value addition, among other factors,” he says.
Addressing misconceptions
Despite growing interest in the asset class, Yanga says private debt remains misunderstood in Kenya.
One of the main misconceptions is that private debt is automatically a high-risk investment.
He says the risk depends on how the financing is structured, how it is managed and the quality of the businesses receiving the funding.
Another misconception is that private debt is only suitable for businesses that have been rejected by banks.
Yanga says healthy and growing businesses can also choose private debt because it can provide faster access to capital, greater flexibility and repayment structures aligned with their cash flows.
He also rejects the perception that private debt operates without regulatory oversight.
Professionally managed private debt funds operate within Kenya’s regulatory framework, with the Capital Markets Authority overseeing the capital markets and supporting innovation while maintaining investor safeguards.
Yanga says private debt should therefore not be viewed as a replacement for traditional financing.
Instead, it should complement existing financing channels by giving businesses and investors another option.
Role in Kenya’s economy
Looking ahead, Yanga believes private debt could play a larger role in expanding the range of financing available to Kenyan businesses.
“Looking ahead, private debt has the potential to transform Kenya’s financial landscape from a bank-dominated, collateral-heavy market into a dynamic, multi-channel ecosystem,” he says.
He adds that private credit can create alternatives to traditional balance-sheet lending and help address some of the long-standing constraints facing businesses seeking capital.
“By creating structural alternatives to traditional balance-sheet lending, private credit directly addresses several long-standing economic constraints and reinforces Kenya’s positioning as East Africa’s leading financial hub.”
For MSMEs, the growth of private debt could provide an additional source of capital at a time when access to affordable financing remains a major challenge.
For investors, the asset class offers exposure to private companies and the potential for income and diversification.
However, the growth of the market will depend on the quality of fund managers, transparency in lending, appropriate risk management and the ability of businesses to generate sufficient cash flows to repay their obligations.
