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Private credit opportunities in emerging markets
Uncertain and volatile markets in recent years have led many investors to retreat and wait for clarity, before allocating capital. In this context, assets with stronger credit metrics have been the natural area of focus, whilst private markets have also offered a haven from volatility.
We believe that those looking at traditional developed market (“DM”) opportunities could benefit from incorporating select emerging markets (“EM”) private debt in their portfolios, in order to take advantage of higher yields for comparatively stronger credit exposure.
In our piece, we look at why the EM private credit opportunity set is compelling and how we believe it can be best accessed.
Key discussion points include:
- Misperceptions around private credit: the biggest hurdle in the EM private credit space is that investing in EM assets equates to higher risk, both on the credit and documentation side. We look at this misperception and the perceived risks, including FX risk, legal frameworks, and reputational risk.
- Navigating current markets: we mainly focus on high quality performing EM credits but enhance these with a small allocation to select stressed names. This allows investors to capitalise on a diversified pool of higher quality investment opportunities that offer asymmetric return profiles and can generate outsized returns.
- A stronger position than DM peers: although it can seem counterintuitive, EM corporates are currently in a stronger position than DM peers and, in many jurisdictions, can offer investors better protection on both financial and documentation fronts. The contrasts, many of which strengthen the position of creditors, are even more evident within private credit.
- Enhanced yield through the illiquidity premium: drivers of capturing this premium are the lack of competition for EM illiquid assets, lack of alternatives, deep sourcing channels, being at the forefront when opportunities arise, and having deep sector and country knowledge for quick decision making.
Uncertainty regarding the market outlook and the corresponding risk aversion could remain a theme for the foreseeable future. This is precisely why investors should carefully assess the risk-reward profiles within their portfolios to ensure they have sufficient diversification in their exposure. With this in mind, and considering that credit spreads are at historical lows, investors in DM private and liquid markets could question whether they are being fully compensated for the credit and market risk they currently hold.
We believe high quality EM corporate private debt investments can make a significant contribution to investment returns while improving the overall credit characteristics and diversification of risk exposure. A selective approach within a closed-end structure provides the optimal approach for accessing outsized excess returns, while protecting against market volatility and downside risk.