Insights from the LATAM Private Debt Market

There is no doubt that private debt is experiencing a significant surge in popularity among investors, primarily driven by its perceived safety, collateralized nature, floating interest rates, and seniority in the capital structure.

Moreover, the ongoing banking crisis, characterized by higher borrowing costs and tightened lending standards, has created opportunities for alternative lenders.

Latin America remains a relatively small portion of the asset class, but our clients have successfully provided loans to companies operating in diverse sectors such as telecommunications, agriculture, logistics, oil and gas, and fintech lending businesses.

However, we are observing a rise in competition among direct lenders aiming to invest in the LatAm mid-market. Those who distinguish themselves are the ones implementing robust creditor rights, engaging in highly structured transactions with quality collateral, tight covenant packages, and rigorous reporting requirements, while also addressing currency and interest rate risks to protect investor interests.

In general, LATAM managers who focus on the region and raise funds from USD-denominated investors for private credit have achieved greater success by reassessing their initial risk management decisions. This includes assuming increased responsibility for hedging instead of relying solely on the discretion of LPs (Limited Partners).

Managers who effectively communicate to investors their understanding of the potential risks associated with volatile interest rate and FX environments, including the resulting impact on borrowers' balance sheets and the increased likelihood of defaults, tend to achieve greater success in their fundraising efforts.

You might be also interested in 5 Questions for GPs to ask themselves during USD Hedged Share Class implementation.

At Deaglo, we specialize in assisting private debt fund managers in effectively managing currency risk that arises from these transactions. Our services include factoring in hedging costs and performance, and implementing safeguards to mitigate risk for investors.