Taking On Wall Street’s Big 3: Carlyle Acquiring Top African Credit Ratings Agency

Taking On Wall Street’s Big 3: Carlyle Acquiring Top African Credit Ratings Agency

In a sign that local credit ratings are becoming more lucrative in Africa, U.S. buyout firm Carlyle has agreed to become the largest shareholder in Africa’s largest rating agency.

Johannesburg- and Lagos-based Global Credit Ratings (GCR) rates more credits on the continent than global giants — and rivals — Fitch, Moody’s and Standard & Poor’s.

It’s a rare pan-African financial acquisition for a buyout group, Financial Times reported. It shows private equity funds are looking to capitalize on the need for banks and insurers to understand the credit risk of local and national players.

GCR operates in 20 countries including South Africa, Nigeria, Kenya and Zambia and says it has more than 400 clients.

Unlike global agencies such as Fitch or Moody’s, which focus on producing internationally comparable corporate gradings, GCR specializes in national-level ratings, which rely less on a country’s sovereign rating, according to Financial Times.

Carlyle wants to broaden the pan-African ratings agency’s services, Reuters reported.  Terms of the deal were not disclosed. Carlyle is buying about half of the equity in GCR from its management founders and German development finance business DEG, which will remain invested in the company, Carlyle said.

GCR was founded in 1996 as the African arm of the New York Stock Exchange-listed Duff & Phelps, a U.S. corporate finance adviser. It grew fast through acquisitions, alliances, and organic growth, and says it assigns more credit ratings in Africa than S&P, Moody’s and Fitch combined, Reuters reported.

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Local credit ratings have already become a lucrative market for agencies in India as its capital markets have opened to mid-sized companies in addition to big corporate debt issuers, Financial Times reported. Dealmakers are betting on a similar trend in Africa.

Big deals are becoming harder to find in Africa for global private equity firms. Company owners are often reluctant to part with controlling stakes.

Marlon Chigwende left his job in 2016 as Africa chief at Carlyle in 2016 to form a new investment firm, Arkana Partners. Arkana plans to go after private equity opportunities in Africa often seen as too small for the buyout industry giants, Reuters reported.

Specializing in national-level ratings, GSR has a model that has “global best practice but also local knowledge,” said Stephen Burn Murdoch, an associate director in Carlyle’s sub-Saharan fund.

“It is a positive thing for a capital market to get as many credit ratings as possible . . . it builds trust,” Burn Murdoch told Financial Times.

Carlyle is already vested in credit ratings. In 2015 it acquired Canada’s DBRS, the world’s fourth largest global credit ratings agency, along with private equity fund Warburg Pincus and a consortium of Canadian individual investors. This challenged the hold of the big three in the industry, FT reported.

In October, BRICS leaders failed to reach consensus on setting up their own credit rating agency during a BRICS summit in India.

The trade association of five emerging economies — Brazil, Russia, India, China and South Africa — is home to half the world’s population and 22 percent of its gross world product.

China voiced concerns over credibility and access to dependable data for a new credit ratings agency if it takes on the Wall Street Big 3 — S&P, Fitch and Moody’s, Indian Express reported.

“Every credit rating agency has to have credibility and access to absolutely dependable data. These two things the experts have to look at now,” said Economic Relations Secretary Amar Sinha to reporters after the Eighth BRICS Summit.

India first raised the idea of such a BRICS credit ratings agency to solve impediments for emerging market economies posed by the present credit ratings agency market, which is dominated by S&P, Moody’s and Fitch. All are based in Wall Street and run with pure commercial considerations.

They hold over 90 percent of the sovereign ratings market. Indian officials were at the forefront of pointing out the shortcomings and need for an alternative credit ratings agency, Indian Express reported.

K.V. Kamath, president of the BRICS New Development Bank, supports a BRICS credit ratings agency, saying growth is constrained in the present credit ratings system.

Carlyle raised $698 million for its Africa buyout fund in 2014 during a boom in African buyout interest, exceeding its $500 million target. Carlyle’s sub-Saharan fund has so far invested about $300 million of it.

Carlyle agreed to buy a majority share of CMC Networks, a pan-African telecommunications business. In September, it agreed to buy a majority share of Amrod, which supplies promotional products and clothing in South Africa and neighboring countries.

In 2016, Carlyle pulled out of a consortium planning to bid on Barclays’ Africa after its U.K. parent announced it was selling down its stake in Africa. South African regulators resisted private equity ownership of the operations.