Emerging Markets: Private Credit's Moment in the Sun
In a landmark financial event this May, the Shapoorji Pallonji Group, a prominent Indian construction conglomerate, secured an impressive $3.4 billion private credit facility. This record-breaking deal for India, one of the world's fastest-growing major economies, saw participation from global financial heavyweights like US-based Ares Management and Cerberus Capital. This significant transaction is widely seen by financiers as a powerful harbinger of future trends in emerging markets.
Nicholas Cheng, Head of the Private Markets Group at Standard Chartered Global Private Bank, emphasized the deal's importance, stating, "The Shapoorji Group event is a strong indicator of the market’s potential. It serves as a proof of concept for other large corporations." Indeed, the stage appears set for a transformative period in emerging market finance, where private credit is poised to play an increasingly vital role.
The Untapped Potential of Emerging Market Private Credit
While the global private credit sector is rapidly expanding towards an estimated $2 trillion in outstanding loans, emerging markets currently represent only a modest fraction of this vast pool. Despite emerging markets contributing a substantial 65% of global GDP, their share in the private credit universe stands at a mere 3%. This stark contrast highlights a significant untapped potential. India, in particular, is emerging as a hotspot within this subsector, absorbing $9.2 billion in private credit last year, marking a 7% increase from the previous year, according to Ernst & Young data.
Investors worldwide are keenly recognizing this growth trajectory. Singapore's sovereign Private Credit Growth Fund has allocated a $1 billion mandate to Apollo Global Management, specifically targeting local high-growth businesses. Similarly, Indian banking powerhouse Kotak Mahindra Bank is reportedly looking to bolster its private credit reserves by $2 billion, as announced by CEO Lakshmi Iyer. South Korea's IMM Holdings successfully closed a $700 million private credit fund, notably backed by Seoul’s National Pension Fund. Matt Christ, a New York-based debt portfolio manager at Ninety One, aptly summarizes the situation: "Now is the time when we see the step change."
Understanding the Gap: Why the Lag in Emerging Markets?
Several factors explain why emerging markets have lagged in private credit adoption compared to their developed counterparts. Historically, the surge in private credit in the US and Europe was largely fueled by private equity firms seeking leverage for acquisitions. However, companies in emerging markets tend to be more financially conservative, often prioritizing stability amidst potential macroeconomic volatility, making leveraged buyouts a less common practice. Moreover, large institutional investors, such as pension funds, typically exhibit a more cautious approach when allocating capital in these regions.
Another key difference lies in the banking landscape. Following the 2008 global financial crisis, regulators in the US and Europe imposed stricter lending rules on banks, inadvertently creating an opening for private credit providers to fill the void. In contrast, banks in many emerging markets, particularly in Asia, maintain a dominant position. Nicholas Cheng points out, "There is still a strong preference for traditional bank relationships in many Asian markets. Educating both borrowers and investors on the benefits of private credit is an ongoing effort."
The Cost-Benefit Equation: Higher Rates for Greater Flexibility
Private credit in emerging markets often comes with a higher price tag compared to traditional bank loans or bond markets. For instance, Shapoorji is reportedly paying a substantial 19.5% annual interest rate in rupees on its three-year loan, significantly above India's benchmark prime lending rate of just under 14%. Michel Lowy, CEO of SC Lowy Financial, notes that his firm’s Indian private credit deals yield an "18%-20% USD equivalent return" over rupee-denominated bank loans. This premium can be even higher, with Matt Christ of Ninety One suggesting that emerging market private credit can be "200 to 300 basis points" more lucrative than developed market transactions.
Despite these higher costs, the value proposition for borrowers is substantial. Private lenders offer critical flexibility in terms and structures, a feature often missing from traditional banking. This adaptability proves invaluable for companies facing specific regulatory hurdles or those underserved by conventional banking systems that haven't kept pace with market growth. For example, in Korea, where regulators are curbing bank exposure to real estate, SC Lowy Financial stepped in with $250 million in short-term bridge financing for a luxury development. In India, Lowy's firm provided over $100 million to a credit card manufacturer unable to secure bank loans for a buyout due to regulations preventing direct lending to holding companies. Lowy concludes that India's financial system "has a real growing need for private credit."
Driving Growth: Data Centers and Innovation
A particularly fertile ground for private credit globally is the financing of data centers, crucial infrastructure for the impending explosion in artificial intelligence. While US-based tech giants like Meta Platforms are making headlines with plans to raise billions for AI expansion, Asian data center capacity is projected to grow faster and surpass the US by the end of this decade, according to Cushman & Wakefield. Many of the operators in emerging markets are local players in urgent need of rapid financing.
Matt Christ highlights the significance of this trend: "Data centers are a huge part of what we’re doing, in India, Latin America, Southeast Asia, everywhere." This is evident in recent deals, such as DayOne Data Centers in Singapore announcing plans to raise $1 billion in private credit, offering 9.5% to 10% annually on a four-year term. Princeton Digital Group, also based in Singapore, unveiled a $400 million program earlier this year, underscoring the robust demand in this sector.
Navigating the Complexities: Hurdles on the Path to Scale
Scaling from these significant but still mid-sized deals to multibillion-dollar transactions, akin to the Shapoorji model, presents considerable challenges in emerging markets. The legal and cultural complexities are often country-specific, leading to a fragmented landscape of relatively smaller markets. India's dynamic economy, for all its growth, remains about one-seventh the size of the US economy. Issues such as uncertain bankruptcy laws can complicate debt recovery, even when agreements are governed by international standards like New York or English Law.
Standard Chartered's Cheng notes, "The regulatory landscape can be complex. This creates challenges for enforceability of covenants and scalability." Such risks often necessitate higher interest rates from lenders, which in turn can narrow the pool of eligible borrowers. Furthermore, major private credit firms from the US and Europe often show limited interest in these localized transactions, preferring the mega-deals available in their home markets where the legal work is less fragmented. Christ confirms this: "We don’t see a lot of crossover from developed markets into emerging market transactions, where the legal work needs to be done on a highly local level."
Conclusion: A Vital Niche for Growth
Despite the inherent complexities and higher costs, private credit is successfully carving out crucial niches in emerging markets. For businesses that are either excluded or inadequately served by traditional, regulated banks, expensive credit is often a superior alternative to no credit at all. A steady flow of deals, often in the hundreds of millions, is progressively reshaping financial landscapes across these dynamic economies. As emerging markets continue their rapid development, private credit is set to remain an indispensable and evolving source of capital.
