Buy-out firms are developing into primary lenders as they pursue debt investments in companies that are growing in emerging markets.
Low interest rates have made traditional investments in the West, such as stocks, bonds and private equity less alluring. Instead investors are now hedging their bets as private creditors. Over the past year, 50 emerging-market private-debt funds closed because they reached their funding target.
Private creditors have more freedom in providing capital. Western banks are not as able to freely provide funds in emerging markets because of regulations that have been implemented after the 2008 economic crisis. These regulations require that there is more liquid capital held for riskier debt that is issued.
However, the amount of credit that has been raised is larger than the current demand. There are over $300 billion in funds ready to be lent out that have not been spent. Additionally, debt being issued in dollars is proving to be inhibiting. Companies in emerging markets are usually unable to afford debt issued in American currency. This means that debt loaned out is restricted to projects backed by government guarantees or companies that price their products in dollars.
Willingness for investors to pursue private credit will grow, but pathways that provide access to a larger array of borrowers need to be established.