Private credit is shifting its focus from developed Western markets to emerging markets as investors search for higher yields. This change reflects a broader trend where private financing is increasingly seen as an alternative to traditional bank lending. Notably, emerging market projects are attracting significant attention from private creditors.
Emerging Markets as the New Frontier for Private Credit
In recent years, the amount of private credit available for emerging markets has been on the rise, driven by investor demand and decreasing options in developed economies. Veteran investors have noted that this trend represents a fundamental shift in investment strategies.
Significant Investment Growth
Private credit assets have surged globally, with total assets under management increasing from $200 million in the early 2000s to over $1.2 trillion today, according to the Bank for International Settlements. However, less than 10% of this capital goes to emerging markets.
- PIMCO has invested around $30 billion in 140 emerging market deals over five years.
- The firm aims to boost its annual lending by 30% in the upcoming year, increasing it to $10 billion.
- Most of the growth in private credit is occurring outside traditional banking systems.
Attractive Yields in Emerging Markets
Experts highlight that yields in emerging markets can be significantly higher than those in developed regions, often by 150 to 300 basis points. This gap offers an attractive incentive for investors, especially as competition in developed markets tightens margins and increases risks.
Matt Christ, a portfolio manager at Ninety One, pointed out that emerging market firms are often more resilient to volatility compared to their developed market counterparts. As instability becomes more common in developed economies, emerging markets remain appealing due to their solid risk profiles and potential for growth.
Case Studies of Successful Projects
One notable project is a new fuel refinery in Angola, primarily financed by Gemcorp, an emerging markets asset manager. This facility, expected to produce 60,000 barrels per day, exemplifies how private credit can support national projects and reduce reliance on expensive fuel imports.
Private Credit Financing Structures
Most private credit in emerging markets is asset-backed, involving tools like company shares or control over projects. Funding extends to various sectors, including infrastructure and sovereign budgets.
- 67% of private credit investments in emerging markets target large or medium enterprises.
- 22% focus on sovereign or quasi-sovereign projects.
Future Prospects
With ongoing interest in high-yield opportunities, projects across Latin America, Turkey, and Africa are attracting private credit. For instance, Gemcorp is launching a $1 billion fund aimed at mid-market Saudi companies, addressing their need for flexible and accessible funding.
Private credit is characterized by its flexibility and speed, featuring customized repayment terms that are particularly beneficial for emerging market firms. While this sector’s growth continues, caution remains among traditional bond investors regarding the risks associated with private credit, particularly in terms of recovery and default scenarios.
In conclusion, as traditional financing channels become more constrained, private credit in emerging markets is poised for significant growth, attracting investors looking for lucrative opportunities. The future of finance appears increasingly intertwined with emerging economies.
