Private credit is well entrenched in developed markets and is now looking to tackle emerging markets at scale.

One example comes from India where lenders are preparing to fund a record-breaking trade for conglomerate Shapoorji Pallonji Group, a Rs282bn (US$3.3bn) offering that will be the largest rupee deal in the domestic private credit market.

SP Group has turned to a lender group that includes large foreign private credit investors and is looking at a yield of close to 20% for a tenor of up to four years. While the size of the SP Group deal might be an anomaly in EM, it is a sign of how lenders are seeking opportunities in different financing pools.

“In EM, you have many of the same drivers as the developed market, but much less competition,” said Mihai Florian, a senior portfolio manager at RBC BlueBay Asset Management.

“You get a better credit profile from the leverage and company perspective, higher absolute returns and higher returns per turn of leverage. Yes, it’s EM, but you get far more reward for that extra risk.”

Increasing interest

In Saudi Arabia, large investors are taking an increasing interest in the scene. In early March, sovereign wealth fund PIF and Goldman Sachs Asset Management signed an MoU to partner on investment in the country. PIF will be an anchor investor for new private credit and public equity strategies focused on Saudi Arabia and other Gulf Cooperation Council countries.

Under the MoU, the private credit strategy will target directly originated senior and junior loans and debt to companies that are domiciled in the GCC region or do most of their business there.

But for many, EM private credit means much smaller-scale lending. It often bridges those holes that exist for small to medium-sized borrowers between traditional sources of funding, due to shallow local capital markets, and banks that are constrained in their ability to lend to corporates.

BlueBay estimates that more than 90% of funding in EM countries for corporates comes from banks, compared with 50%–60% in Europe and 20%–40% in the US, providing a significant opportunity.

“There is barely any competition and so much demand for capital,” said Felipe Berliner, head of structuring at EM investment management firm Gemcorp. “Finding projects to invest in is not the problem. It is the scarcity of capital to fulfil the vast funding gap in emerging markets as a whole.”

His firm takes a flexible approach, working with corporates, quasi-sovereigns and sovereigns in a variety of transactions across a range of sectors. Ticket sizes can range from as little as US$5m in trade financing structures, up to US$250m–$400m for infrastructure deals that might involve working with co-investors.

Yaser Moustafa, head of emerging market private investments at Janus Henderson Investors, said demand for smaller private loans is underserved. The fund, which lends to SMEs in the Middle East with loans of US$12m–$35m, started in 2009 as NBK Capital Partners before Janus Henderson’s acquisition in 2024. The fund is on a fourth fundraise and seeks average returns of 14%–16%.

“It is not as cheap as bank financing but the benefits are that the funding is flexible and long term,” said Moustafa.

“If you need the funding fast or for a cross-border transaction, then there is this massive financing gap. It’s providing a lot of security, with low leverage and Western-style private credit returns, making for a very clear lane of opportunity.”

Gramercy Funds Management’s private credit portfolio is anchored in Latin America, representing 75% of the portfolio, with the largest allocations in Mexico and Brazil. The firm has growing ambitions in Turkey and Peru, looking to deploy US$1bn in private credit deals in the next 18–24 months, having already deployed US$500m in the former country and US$700m in the latter.

Gramercy has deployed more than US$6bn across nearly 200 private credit investments since its 2018 inception.

“We provide US dollar loans with robust downside protection [and] low duration, seeking low-to-mid teens returns,” said Gustavo Ferraro, head of Gramercy Capital Solutions. “Around 90% of our lending is senior secured first lien and is highly covenanted.”

Moustafa said EM private credit offers lenders access to high levels of security.

“We have 100% share pledges,” said Moustafa. “We have the ability to hire or fire the CFO, chart strategies, have access to bank accounts. It’s not a loan-to-own, but we have that ability to step in.”

Moustafa said the less palatable option for many borrowers in the Middle East would be to find a private equity buyer to purchase a minority stake. That can generate friction over valuing the company, as well as any sponsor’s desire to control the business and potentially exit within a few years.

Nascent market

Beyond private credit potentially offering borrowers more control over their business than private equity, direct lending deals in EM confer a number of benefits over the developed market equivalent. The stigma for some investors around EM is also a double-edged sword.

“Some allocators or investors are more familiar with EM, but private credit in EM is still a nascent market,” said Martijn Proos, co-head of emerging market alternative credit at investment manager Ninety One.

“Loss rates are significantly lower than would be suggested by the ratings for the portfolio – these are often capped at sovereign rating levels. In addition, you get paid a significant premium over DM credit markets comparatively while still predominantly lending in senior secured debt markets against strong corporate balance sheets or strongly risk-mitigated project finance transactions."

Ninety One engages in a wide range of financings, from working in consortiums with commercial banks, development finance institutions or multilateral development banks, to acting as sole lender. It works across the whole capital stack, although the majority of lending is senior secured seeking yields of 8%–15%. The financing is mostly in US dollars, with tickets running from US$15m to US$75m.

“Private credit in EM may not be the top priority for investors but this represents a very big opportunity for growth,” said Alper Kilic, head of alternative credit at Ninety One.

“Compared to sponsor-driven, highly leveraged companies in DM, for us this is senior secured lending at three turns of leverage for very strong cash-producing companies under English law. The reality on the ground versus the perspective from allocators is a big gap.”

Additional reporting by Sudip Roy and Krishna Merchant.

Source: IFR