The Quiet Revolution: Private Credit's Rising Tide in Emerging Markets

"In the quiet corners of the financial world, where others see risk, we see opportunity. Emerging markets are not just a frontier—they are the future."

Private credit, once a niche strategy, has grown into one of the fastest-growing asset classes. But what exactly is private credit? It refers to non-bank lending, typically involving direct loans to businesses, tailored to the borrower’s specific needs. The origins of private credit can be traced back to the United States in the 1980s, a period marked by significant changes in the banking sector.

From the end of World War II in 1945 until the 1980s, the number of Federal Deposit Insurance Corporation (FDIC)-insured banks in the United States ranged between 13,000 and 15,000. However, following the Savings & Loans Crisis and the Great Financial Crisis, this number drastically decreased. Today, there are approximately 4,000 banks left, a significant drop from the peak in the mid-1980s. This consolidation left a large gap in the market, particularly for medium-sized businesses that traditionally relied on these banks for financing. This gap was filled by non-banking financial companies and Business Development Companies (BDCs), which emerged as key players in providing tailored lending solutions to medium and small companies.

Since the 1980s, and notably following the 2008 Financial Crisis, private credit has rapidly expanded its shores, supported by the openness of financial markets, improvements in legal frameworks, and the growing need for capital. ?Just as private credit gained prominence in the U.S., it soon rippled into emerging markets. Emerging markets have long been perceived as high-risk, high-reward territories. But as Marcel Proust famously said, "The real voyage of discovery consists not in seeking new landscapes, but in having new eyes."

Investors in private credit are beginning to see opportunities where traditional financiers see only risk. These opportunities have been highlighted in recent years, as the global financial landscape has faced significant challenges - from interest rates reaching a 15-year high, to the mini bank crisis of March 2023 and the lingering effects of the COVID-19 pandemic, making it increasingly difficult for small and midsize corporate borrowers to secure funding.

Private credit offers several key advantages, including attractive returns, inflation protection through variable interest rates, strong financial covenants, and the flexibility to tailor loans to specific needs. However, private credit is not just about higher returns—it's about impact. In regions where access to finance can be the difference between stagnation and prosperity, private credit is driving economic development, creating jobs, and fostering innovation. By providing capital to companies that might otherwise struggle to secure funding, private credit is helping to fuel economic growth and improve infrastructure.

Below is a graph that illustrates the growth of private credit assets under management over the past decade, with projections showing continued expansion. This growth is a testament to the critical role private credit plays in the development of emerging markets.

As emerging markets continue to evolve - characterised by increased economic integration, financial liberalisation, and digital transformation –significant economic shifts have been noted, including inflationary pressure. This causes traditional banks to tighten lending due to increased risks associated with higher inflation and uncertain economic conditions. ?The role of private credit has therefore become more than just an alternative – it’s increasingly a necessity.

With traditional banks constrained by regulations and capital requirements, private credit plays a crucial role in financing growth in these regions. The shift towards sustainable and impactful investing is also expected to enhance private credit's appeal. Investors are increasingly seeking to align their portfolios with environmental, social, and governance (ESG) principles, and since private credit is tailored to the borrower’s needs, it offers a unique opportunity to achieve these goals while generating strong returns.

The rise of private credit in emerging markets represents a quiet revolution in the world of finance. The revolution may be quiet, but its impact will be loud.

Are you ready to be part of it?