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Expanding economies and bank regulatory hurdles prompt emerging-market companies to tap the private credit market.
Shapoorji Pallonji Group, an Indian construction company, made its mark in financial history in May, when it took down a $3.4 billion private credit facility, shattering records for the world’s fastestgrowing big economy. Lenders included US-based heavy-hitters Ares Management and Cerberus Capital.
Financiers hope the deal is a sign of things to come.
“The Shapoorji Group event is a strong indicator of the market’s potential,” says Nicholas Cheng, head of the Private Markets Group at Standard Chartered Global Private Bank. “It serves as a proof of concept for other large corporations.”
Emerging markets so far represent a tiny slice of a global private credit sector that is roaring toward $2 trillion in outstanding loans. India, probably the subsector’s hottest jurisdiction, absorbed $9.2 billion in private credit last year, a 7% increase from 2023, according to Ernst & Young.
Singapore’s sovereign Private Credit Growth Fund handed Apollo Global Management a $1 billion mandate to “target local high-growth businesses,” a government website revealed in July. Indian banking power Kotak Mahindra Bank is looking to add $2 billion to its private-credit war chest, CEO Lakshmi Iyer said in April. South Korea’s IMM Holdings closed a $700 million private credit fund over the summer with backing from Seoul’s National Pension Fund.
Investors near and far are gearing up for growth.
“Now is the time when we see the step change,” predicts Matt Christ, a New York-based debt portfolio manager at asset manager Ninety One. “Emerging markets account for 65% of global GDP, but only 3% of the private credit universe.”
There are reasons for the lag. Private credit in the US and Europe has been primarily driven by private equity firms borrowing to make or add leverage to acquisitions. Emerging market companies are more financially conservative, with one eye always out for macroeconomic instability, and leveraged buyouts are rare. Pension funds and other pots of capital also tend to be more cautious.
“India’s financial system … has a real growing need for private credit.”
Michel Lowy, SC Lowy Financial
“The appetite for highly levered capital structures is dramatically lower in emerging markets, both among institutional investors and companies themselves,” says Christ.
In the US, and to a lesser extent Europe, regulators opened the door to private credit by restricting banks from lending they viewed as risky following the 2008 global financial crisis. But in emerging markets, banks remain more dominant, Cheng observes: “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.”
Compounding the difficulty is the extra cost of private credit relative to bank loans or bond markets. Shapoorji is reportedly paying 19.5% annual interest in rupees on a three-year loan. That compares to a benchmark prime lending rate of just below 14%, according to Indian Bank’s website. Michel Lowy, CEO of Hong Kong-based SC Lowy Financial, says his Indian private credit deals earn an “18%-20% USD equivalent return” over rupee-denominated bank loans.
Emerging market private credit can be more lucrative than developed market transactions by “200 to 300 basis points,” says Christ at Ninety-One, which lends mostly in dollars.
Regulatory Hurdles, Data Center Opportunities
Paying these premiums can nonetheless be worth it to borrowers who end up on the wrong side of regulatory guidance or are poorly served by banking systems evolving less rapidly than their markets. Lowy’s most active private credit market is Korea. Regulators there are have been looking to rein in rising housing prices by “putting pressure on the banking system to decrease exposure to real estate,” he says.
That leaves some developers to raise cash by any means necessary. SC Lowy jumped into the breach in July, organizing $250 million in “short-term bridge financing” for “a completed luxury development” in Seoul’s Gangnam district.
The firm is compensating for regulatory rigidities anomalies in its No. 2 market, India, too. An Indian credit card manufacturer sought funds to buy out minority shareholders and “settle debt in a subsidiary,” Lowy recounts. Their obstacle was that Indian banks are not allowed to lend directly to holding companies, only their operating subsidiaries. Lowy stepped in with a private credit facility “in excess of $100 million.”
“The development of India’s financial system has not kept pace with the growth of the economy,” Lowy concludes. “They have a real growing need for private credit.”
Private lenders can earn their extra interest with greater flexibility on structures and terms, Christ says: “We can have longer maturities than bank credit, which is generally two to three years. We might also mix cash with payment in kind. We go under the tent and work with management teams.”
Fruitful new terrain for private credit globally is financing the data centers needed to service an expected explosion in AI. US-based hyperscalers have grabbed the headlines with their ambitious plans in the field. Mark Zuckerberg’s Meta Platforms lately floated its intention to raise $26 billion in private debt for AI expansion. But Asian data center capacity is growing faster and will overtake the US by the end of this decade, global real estate advisor Cushman & Wakefield predicts.
Many of the operators across emerging markets are local players scrambling to raise money fast. “Data centers are a huge part of what we’re doing, in India, Latin America, Southeast Asia, everywhere,” Christ says.
He’s not the only one.
In June, DayOne Data Centers in Singapore announced plans to raise $1 billion in private credit. The company will borrow in dollars, paying 9.5% to 10% annually on a four-year term, according to published reports. Princeton Digital Group, also Singapore-based, unveiled a $400 million program in April.
Legal And Cultural Complexities
Expanding from these sorts of numbers to multibillion-dollar private credit deals on the Shapoorji model will not be easy in emerging markets. Legal and cultural complexities can only be tackled one country at a time, leaving a fractured playing field of relatively small markets. India’s economy, for all its dynamism, remains one-seventh the size of the US.
Bankruptcy laws can leave recovery of bad debts uncertain, even if lenders are able to press agreements governed by New York or English Law, the global standards.
“The regulatory landscape can be complex,” Standard Chartered’s Cheng observes. “This creates challenges for enforceability of covenants and scalability.”
Lenders will look to compensate for these risks with higher interest rates, which may shrink the pool of potential borrowers. US and European private credit giants show limited interest anyway, given the mega-transactions they increasingly tackle back home.
“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,” Christ says.
Still, private credit is finding its niche, or niches, in emerging markets, and a steady stream of deals in the hundreds of millions can alter financial landscapes. For borrowers left out or unsatisfied by traditional, regulated banks, expensive credit can be better than no credit.
