Emerging markets private credit: An uncrowded trade

Around $1 trillion has flowed into the asset class since 2020, increasing competition for suitable deals.¹

Crowded credit markets can create two familiar problems: lower prospective returns and weaker lender protections. As managers seek to deploy committed capital, competition can weaken origination discipline and shift negotiating power towards borrowers.

In some parts of the market, leverage has risen, covenant protection has weakened and asset-light borrowers represent a larger share of issuance.

Payment-in-kind interest, once used more selectively, now accounts for a greater share of reported income in parts of the direct-lending market. For example, one in four borrowers no longer generate enough cash from earnings to cover their interest costs.²

Defaults have also begun to rise, reflecting pressure from higher borrowing costs and weaker underwriting in some market segments.³

A market that still favors lenders

In selected emerging markets (EM), however, the supply-demand balance can be more favorable to lenders. Capital markets remain underdeveloped and banking penetration is low in many countries.

At the same time, demand for capital is high, particularly in economically important sectors such as telecommunications, energy, transport, and infrastructure. This imbalance is commonly known as the ‘EM financing gap’. In many cases, it reflects limited financing capacity rather than a lack of creditworthy borrowers.

With fewer sources of capital available, lenders may be able to negotiate stronger security, tighter covenants, and more attractive pricing.

In developed markets (DMs), borrowers may choose private credit for speed, flexibility, or certainty of execution. But some also use it because their size, complexity or credit profile limits access to public markets.

By contrast, many EM private credit borrowers already have access to local banks or bond markets, and some have public debt outstanding.

This opportunity exists partly because of a structural capital shortfall. Investors commonly partner with local and international financial institutions to finance creditworthy borrowers.

EM private credit can therefore involve financing established, bankable borrowers rather than providing capital for a last resort. This distinction matters when assessing credit risk and how it may develop over time.

Familiar structures, different opportunity set

It is a common misconception that EM deals carry greater structural complexity than their DM equivalents.

In practice, many of the transactions we assess use structures familiar to institutional credit investors. They are typically denominated in US dollars or euros, structured as syndicated loans or private placements, and governed by English or New York law. Loan documentation may draw on Loan Market Association templates and conventions.

Nor are the borrowers unknown quantities. Many already have publicly traded bonds, audited disclosure, and long operating histories. This means underwriting builds on an existing body of credit work rather than starting from a blank page.

In the transactions we consider most attractive, leverage is moderate and secured structures can offer substantial collateral coverage. More broadly, EM high yield issuers have historically carried lower leverage than comparable US or European issuers.³ Lower leverage and tighter structures create a wider margin for error when conditions deteriorate.

Separating illiquidity from credit risk

Private credit investments are by nature less tradable than in public markets and investors are right to expect higher returns for giving up liquidity.

In isolation, pursuing higher-yielding opportunities is a strategy fraught with danger. The aim is to identify opportunities where most of the additional yield compensates investors for illiquidity and origination complexity, rather than weaker credit quality or looser structural protection.

To measure the illiquidity premium, investors must compare a private loan with a public instrument carrying similar credit, structural, currency, and duration risks. Investors therefore need to understand which risks the public comparator captures and how those risks may behave through the cycle.

In the opportunities we have assessed, private credit pricing has typically offered an illiquidity premium of some 200 to 300 basis points over comparable public instruments.⁵ That premium has accompanied senior secured structures, floating-rate coupons and weighted-average lives of two to three years. These transactions typically pay interest in cash, while amortizing structures return capital progressively rather than concentrating repayment at maturity.

Selection matters

Country, political, governance, legal, and currency risks remain material. Investors therefore need to assess enforceability, cash flow resilience, foreign exchange exposure, and recovery prospects under stressed conditions. Strong documentation cannot eliminate these risks, but it can improve lenders’ position when conditions deteriorate.

Experience across EM sovereign and corporate debt can help investors distinguish structural financing gaps from weak credit fundamentals. Local relationships may also broaden access to transactions and improve the quality of due diligence.

Even so, selectivity remains essential: attractive headline yields do not compensate for every country, currency, or recovery risk.

Endnotes

¹ Morgan Stanley, October 2025. ² KBRA Middle Market Default Monitor (KMDM), May 2026. ³ KBRA Middle Market Default Monitor (KMDM), June 2026. ⁴ JP Morgan, March 2026. ⁵ Based on indicative transactions seen during 2024 and 2025. Private credit transactions are sourced via partner banks based on existing loan inventory and primary market transactions. The opportunities above are not representative of any existing Fund, but rather are a list of potential opportunities that have been analyzed by Aberdeen.

Important information

Past performance is not an indication of future results.
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Private credit investments involve risks, including the possible loss of principal. These investments are generally less liquid than publicly traded securities, may be difficult to value, and can be affected by borrower defaults, economic conditions, and changes in interest rates. Because private credit investments are not publicly traded, investors may have limited ability to sell their investment and may experience delays in accessing their capital.
Private credit investments are generally intended for sophisticated investors who are capable of evaluating and bearing the risks associated with long-term, illiquid investments, including the possible loss of some or all invested capital.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

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