As perceptions around risk evolve, emerging markets are drawing new attention from institutional investors. Steven Ward explores the triggers behind the shift, highlighting the influence of development finance institutions.
Emerging markets currently represent less than 10% of the $1.7trn global private credit market [1]. But as institutional investor appetite gathers momentum, this could be about to change.
While most emerging market debt has historically been raised in the form of bond issuances, we are now seeing a growing number of private funds being raised to issue privately negotiated loans to emerging markets borrowers.
Gramercy Funds Management, for example, has amassed $760m and is already eyeing its next fund. Ninety One is poised to close a fund on $500m early next year. Legal & General, meanwhile, has committed up to $100m to a new women-led firm ImpactA Global, which will provide infrastructure debt financing to address climate challenges and social inequality in regions including Latin America, Africa and South Asia.
Indeed, we are seeing growing interest from both LPs and GPs looking to target the full gamut of private credit strategies, from infrastructure debt to corporate direct lending and asset-based finance, in an emerging markets context.
This increased appetite is partly the result of shifting perceptions around risk and in particular, how emerging markets risk stacks up against developed markets.
It is often developed markets today that are grappling with stalled growth, large fiscal deficits and escalating political instability. By contrast, emerging markets, which have been outstripping developed markets on growth for decades, grew by 3.7% in the year to April 2025, compared to 1.4% for advanced economies, according to the IMF [2]. Furthermore, many emerging market corporates have de-leveraged significantly in the wake of the pandemic, and are now presenting more attractive leverage ratios than their developed market counterparts.
In addition, emerging markets don’t display the same shadow lending interconnectedness between public and private markets that is coming under increasing scrutiny in the developed world.
Perhaps most critically of all, investors are also coming to realise that concerns around high default rates in emerging markets are unfounded, or at least outdated. Data from S&P Global shows a 0.9% 12-month trailing speculative-grade default rate for emerging markets, compared to 4.3% for the US and 3.8% for Europe [3].
In addition to these reassuring macro fundamentals, managers raising emerging markets private credit funds are going out of their way to alleviate remaining concerns.
Many are being cornerstoned, or at least supported, by development finance institutions that are taking first-loss positions to assuage institutional concerns and to catalyse private capital investment.
Most funds being raised are taking senior positions and the funds themselves are not being leveraged in the way that has now become the norm in developed market fund structures.
Investors are also being offered excuse rights in relation to certain jurisdictions where investors have concerns over issues such as political change. This does present certain execution challenges for the manager, which in the absence of fund finance facilities, needs to be certain it has the funds in place to proceed with a deal. However, it also means that there is a higher level of pre-deal communication between LPs and GPs than would typically be the case, which may also offer reassurance to investors.
Furthermore, currency is typically not a concern given that most funds are raised and deployed in dollars, negating the need for expensive hedging or volatile FX spot conversions.
The sheer heterogeneity of regions such as Latin America and Africa, meanwhile, means that significant risk diversification can be achieved for firms that reach the necessary scale to accommodate institutional investors.
Finally, ESG, which has clearly become a contentious issue in the US, but which remains a priority for many investors, most notably in Europe, has historically been an area of concern in relation to emerging markets. Private credit managers running emerging markets strategies are therefore increasingly integrating ESG into decision-making and reporting on a level that would normally be associated with an equity fund, despite the associated cost.
Risk perceptions around emerging markets continue to be challenged but provide some compelling market opportunities for investors. At the same time, private credit managers targeting emerging markets are taking significant steps to alleviate any residual concerns that institutional investors may have and are opening up investment opportunities beyond DFIs to a global institutional investor base.
Against this backdrop, we expect to see a growing number of private credit funds being raised focused on loan origination to emerging markets borrowers, supported by a combination of DFIs and institutional limited partners including insurance companies and financial institutions in the coming months.
If you have a query you would like to discuss with one of our private capital specialists, please get in touch.
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