Beyond the comfort zone: emerging markets in the private credit 2.0 era

<div class="grid grid--33-66-col"><div class="col"><img loading="lazy" src="/getContentAsset/ec7b6482-68e6-4583-b158-b380103b3a01/cb87803a-320c-480f-ab75-7b9029eaaf79/Felipe-Berliner-1_1.jpg?language=en" alt="Felipe Berliner 1_1" title="FELIPE BERLNER 1_1" style="width: 180px" class="fr-fic fr-dib fr-fil"></div><span style="font-size: 12px"><div class="col"><strong>Felipe Berliner<br></strong>CO-FOUNDER, HEAD OF STRUCTURING &amp; BOARD MEMBER<br><br><p>Felipe Berliner is one of the co-founders and is responsible for the firm’s structuring team. He is also a member of the Investment Committee. He has spent most of his career at Merrill Lynch and Goldman Sachs within the emerging markets structuring team. Prior to Gemcorp, he was at VTB Capital working on financing companies, financial institutions and sovereigns in Sub-Saharan Africa, Latin America, Eastern Europe and Asia. Before his banking career, he worked as a capital markets, M&amp;A and project finance lawyer. He holds a Law degree from Universidade Candido Mendes and an MBA from INSEAD.</p></div></span></div><hr><p>Throughout its history, private credit has thrived on structural change. But as developed markets mature, the case for diversification is growing stronger. Felipe Berliner, Co-Founder and Head of Structuring, sets out why emerging markets could be the next frontier for the private credit asset class.</p><p><a href="/getContentAsset/6a0be2fc-61b0-4c96-9f0d-5803e93226f4/5f5b9764-8a38-435a-8b09-02c00158ddb4/Article-Diversification-emerging-markets-in-the-private-credit-2-0-era.pdf?language=en" target="_blank" rel="noopener noreferrer"><strong><u><span style="font-size: 18px">Download the article</span></u></strong></a></p><p><br></p><h2 style="font-size: 2rem">Key takeaways</h2><ul><li>Private credit remains compelling, anchored by bank retrenchment and borrowers’ need for flexible capital.</li><li>Yield compression between private credit and other traditional fixed income strategies, looser covenants and rising usage of Payment In Kind (“PIK”) instruments combined with rising default rates in the US and Europe are eroding the diversification and low correlation benefits which attracted investors into the private credit asset class.</li><li>Emerging market private credit can offer higher yields with lower leverage, tighter covenants, stronger security, better governance and lower correlation to developed market credit cycles, enhancing portfolio resilience while delivering measurable real-economy outcomes.&nbsp;</li></ul><h2 style="font-size: 2rem">The enduring appeal of private credit</h2><p>Private credit has grown from a niche strategy into one of the most important asset classes of the post‑financial crisis era. Global assets under management exceed $1.7 trillion today and are expected to reach $2.6 trillion by the end of the decade.¹&nbsp;</p><p>The drivers for growth are structural. Prudential regulations and a renewed focus on balance‑sheet strength have driven banks away from riskier parts of the lending market, creating a role for non‑bank lenders who can manage complexity, move quickly and maintain strong relationships with borrowers.</p><p>Borrowers value the speed and flexibility private loans offer. Investors value stable cashflows, minimal mark‑to‑market volatility and the ability to access differentiated exposures by sector, seniority and collateral. For well over a decade, the asset class has delivered what institutional investors needed most: attractive risk-adjusted returns with comparatively modest drawdowns and low correlation.&nbsp;</p><p>Private credit is now an intrinsic part of the global financial system. In the US alone, banks provide more than a trillion dollars of financing to nonbank lenders, from subscription lines to warehouse facilities, reflecting the degree to which private credit has become a conduit for credit creation.²</p><p>With the asset class consistently proving a compelling alternative to public fixed income markets or traditional levered syndicated loans, investor interest has broadened. Insurance companies and pension schemes have dedicated allocations; wealth platforms increasingly offer access to high‑net‑worth clients; and policymakers in some jurisdictions are pushing for retirement savers to have the same opportunity to invest. These developments signal mainstream acceptance, but also bring responsibilities around transparency, liquidity management and the alignment of interests between managers and their investors.²</p><p>None of this diminishes the investment case for private credit. If anything, it reinforces it. As banks continue to scale back in mid‑market and specialised lending, the need for flexible, well‑structured capital will persist. The question for investors is not whether private credit deserves a place in their portfolio, but where they should allocate to ensure they can continue to achieve attractive and diversified returns.&nbsp;</p><h2 style="font-size: 2rem">From insurgent to incumbent</h2><p>Success brings competition and competition compresses returns. In developed market private credit, that dynamic has become all too apparent. According to Lincoln International’s Senior Debt Index, the yield-to-maturity on US direct loans fell to about 10.1% in Q2 2025, while broadly syndicated loans stood near 7.8%. The gap between the two asset classes has narrowed well below its historical average as capital pours into private credit and pricing power shifts towards borrowers.³</p><p><strong>Figure 1</strong> Yield compression: US direct lending (LSDI) vs broadly syndicated loans (BSL), 2015–2025.</p><p>&nbsp;<img loading="lazy" src="/getContentAsset/d752dc30-0a99-472c-9b48-04bbcc4341e5/cb87803a-320c-480f-ab75-7b9029eaaf79/graf-Comparison-of-Yields.png?language=en" alt="Comparison of Yields" title="Comparison of Yields" style="width: 100%" class="fr-fic fr-dib"></p><p><span style="font-size: 12px">Source: (1) Lincoln International LLC (2025) Q2 2025 Lincoln Senior Debt Index. Comparison of Yields – LSDI (All Loans) to Broadly Syndicated Loans (BSL) Market Available at: <a data-fr-linked="true" href="https://www.lincolninternational.com/publications/research-indices/q2-2025-lincoln-senior-debt-index/">https://www.lincolninternational.com/publications/research-indices/q2-2025-lincoln-senior-debt-index/</a> including the Lincoln Senior Debt Index and Morningstar LSTA US leveraged Loan 100 Index Available at: <a data-fr-linked="true" href="https://indexes.morningstar.com/indexes/details/morningstar-lsta-us-leveraged-loan-100-FS0000HS44">https://indexes.morningstar.com/indexes/details/morningstar-lsta-us-leveraged-loan-100-FS0000HS44</a>. US HY Yield: ICE BofA US High Yield Index Effective Yield (BAMLC0A0CMEY) Available at <a data-fr-linked="true" href="https://fred.stlouisfed.org/series/BAMLC0A0CMEY/">https://fred.stlouisfed.org/series/BAMLC0A0CMEY/</a>. ICE BofA US High Yield Index Effective Yield (BAMLH0A0HYM2EY) Available at <a data-fr-linked="true" href="https://fred.stlouisfed.org/series/bamlh0a0hym2ey">https://fred.stlouisfed.org/series/bamlh0a0hym2ey</a>.</span></p><p>Concentration risk adds another layer to the story. The largest managers command a growing share of dry powder and can increasingly set market terms. This mirrors patterns seen in high yield two decades ago and raises questions about whether picking between multiple big‑name managers can provide meaningful diversification when they are competing for the same deals in the same geographies.</p><p>Meanwhile, documentation has softened at the margins. Research shows a marked rise in selective defaults, distressed exchanges and maturity extensions to avoid formal bankruptcy filings, alongside greater use of PIK features. According to S&amp;P Global data, selective defaults outnumbered conventional defaults by five to one in 2024, with around 60% of global corporate defaults falling into the ‘selective’ category. While these patterns may reflect a rational attempt to preserve enterprise value, they also suggest that headline default rates can understate underlying credit stress.²</p><p><strong>Figure 2</strong> Comparison of annual default rates in emerging markets against B-grade investment companies in developed markets.</p><p>(1) Asian financial crisis. (2) Dotcom bubble. (3) Global financial crisis. (4) Commodity price crisis. (5) Covid-19.</p><p>&nbsp;<img loading="lazy" src="/getContentAsset/f58a2847-ee10-46d5-9ded-166812315a71/cb87803a-320c-480f-ab75-7b9029eaaf79/Gemcorp-internal-analysis.png?language=en" alt="Gemcorp internal analysis" title="Gemcorp internal analysis" style="width: 100%" class="fr-fic fr-dib"></p><p><span style="font-size: 12px">Source: Gemcorp internal analysis; Moody’s; S&amp;P.</span></p><p>The business development company (BDC) universe, listed companies investing in private credit vehicles, provides an additional window into late‑cycle behaviour. Among the 15 largest US BDCs, the share of investment income attributable to PIK has increased from near 5% in 2020 to over 8% today, and in several cases exceeds 10%. Rising PIK useage is not inherently problematic, yet a sustained increase is consistent with borrowers seeking to preserve cash as conditions tighten.⁴</p><p><strong>Figure 3</strong> PIK on the rise: Average PIK share of investment income for top 15 US BDCs, 2020–2025; selected issuer 10‑Qs.</p><p>&nbsp;<img loading="lazy" src="/getContentAsset/a859e7fa-7a50-4ab2-8c10-1c5e043da95e/cb87803a-320c-480f-ab75-7b9029eaaf79/PIK-Income-Generation-Last-12-Months.png?language=en" alt="PIK Income Generation Last 12 Months" title="PIK Income Generation Last 12 Months" style="width: 100%" class="fr-fic fr-dib"></p><p><span style="font-size: 10px">Source: Gemcorp internal analysis. Pitchbook Financial Database Q2 2025. PIK Income Generation Last 12 Months. Note: Business Development Companies (BDCs), Payment-In-Kind (PIK). 15 BDCs: New Mountain Financial (NMFC), FS KKR (FSK), Goldman Sachs (GSBD), Prospect Capital (PSEC), Hercules (HTGC), Carlyle (CGBD), Blue Owl Capital Corporation (OBDC), Ares Capital Corporation (ARCC), Oaktree (OCSL), Midcap (MFIC), Golub Capital (GBDC), Sixth Street (TSLX), Morgan Stanley (MSDL), Blackstone (BXSL), Mainstreet (MAIN).</span></p><p>Liquidity is another subtle but important change. As secondaries expand and portfolios mature, segments of developed market private credit have started to trade more like public credit, specifically the broadly syndicated loan market. That can be positive for price discovery and exit optionality, but it also reduces the illiquidity premium available to investors and pushes correlations higher. In short, developed market private credit is behaving less like an alternative asset class and more like a core fixed‑income allocation. For asset owners who have built positions in search of differentiated returns across market cycles, this matters.</p><h2 style="font-size: 2rem">What diversification should mean now</h2><p>Diversification within private credit used to be straightforward: split commitments across managers, vintages and sectors and rely on the dispersion of opportunity.</p><p>As the asset class has matured in the US and Western Europe, those levers no longer guarantee genuine risk diversification. North America is still the centre of gravity, representing roughly two‑thirds of global AUM, with Western Europe making up most of the remainder.¹ Splitting allocations across a handful of managers who all fish in the same pond is not diversification. It is capital recycling.</p><p>True diversification requires the introduction of different return drivers – different geographies, borrower profiles and structures. It means financing assets and companies outside the crowded middle‑market sponsor universe. It also means prioritising documentation and security packages that give lenders and, by extension, their investors control in case things go wrong.&nbsp;</p><p>This is where emerging market private credit could play a defining role.</p><h2 style="font-size: 2rem">The case for emerging market private credit</h2><p>When we launched our emerging market private credit strategy more than a decade ago, our conversations with investors were largely driven by two questions. First, why private credit? Second, why emerging markets? The first question has been answered definitively. The second question is becoming more straightforward to address as developed market returns compress, and institutional investors look elsewhere for uncorrelated sources of income.</p><p>Scarcity is one factor. Private credit AUM in developed markets is estimated at around $1.7 trillion, compared to roughly $130 billion across emerging economies. This mismatch is down to perception rather than opportunity. Emerging market populations remain underbanked, domestic banks (except for some specific emerging market countries) are constrained by the low level of savings in their economies reflecting a young population profile and nascent industry; while projects and companies’ need for long‑dated, flexible capital is immense. In such conditions, lenders can be more selective, have greater power to set terms (including governance) and secure robust protection.¹</p><p>Emerging market private credit transactions can offer yields in the mid-teens or higher depending on sector and structure, but headline yield is not the only attraction. Loans are often secured against hard assets or export receivables, documented under English or New York law and structured around hard‑currency cashflows. Borrowers tend to operate with lower leverage and better interest coverage than developed market counterparts, precisely because capital is scarce and the bargaining power sits with the lender.</p><p>Furthermore, risk in emerging markets is frequently misunderstood and consequently mispriced. Across a dataset of more than 15,000 emerging market loans spanning 1994-2023, the average default rate was about 3.6%, lower than the 4.0% observed for Moody’s global B3 cohort and only marginally above the 3.3% associated with S&amp;P B‑rated corporates. During the dot‑com bust and global financial crisis, emerging market defaults did not spike in lockstep with developed market high yield, underscoring the benefit of having exposure to different economic cycles and borrower profiles.⁵</p><p>Lender control is equally important. In many emerging market transactions, the lender is the sole creditor, which simplifies decision‑making in periods of stress. Structures commonly include maintenance covenants, accelerated amortisation features, cash‑sweep mechanisms and step‑in rights. Security is often held offshore via holding company structures in established legal jurisdictions, reducing potential enforcement challenges. Political risk insurance or multilateral guarantees can also be included where appropriate.</p><p>As for mitigating local macro risks and currency volatility, it makes sense to focus on businesses with natural hard‑currency revenues, such as exporters, commodity producers and logistics platforms, and to include covenants that allow for hedging where needed. The objective is not to eliminate volatility, which is impossible, but to minimise it out of the cashflows available for debt servicing. In our experience, rigorous structuring can provide downside protection that compares favourably with developed market loans, which often rely more heavily on sponsor support than asset‑level security.</p><p>Finally, the opportunity set is expanding for reasons that have little to do with the credit cycle. Deglobalisation and the realignment of supply chains are creating demand for domestic infrastructure, logistics and energy systems across Africa, the Middle East and parts of Asia. Both traditional infrastructure such as ports, power and transport and digital infrastructure, including data centres and fibre, require flexible private capital to move from the planning stage to execution. These are not speculative themes. They are long‑term investment opportunities backed by tangible assets and essential services.</p><h2 style="font-size: 2rem">Addressing the usual objections</h2><p>Three concerns tend to dominate discussions with investors considering an allocation to emerging market private credit: governance, enforceability and exits. While all are legitimate, none are insurmountable.&nbsp;</p><p>On governance, the key is proximity and alignment of interests. Working with established local partners, insisting on board representation and embedding information rights creates oversight that often goes above what is available in mid‑market lending in developed markets.</p><p>On enforceability, the combination of English or New York law, offshore security and single‑point‑of‑enforcement structures materially increase the predictability of outcomes.&nbsp;</p><p>As for exits, we prefer amortisation to optionality. Emerging market private credit is not about trading; it is about getting repaid from operating cashflow. As such, the focus should be on self‑liquidating structures, strong sponsors and covenants that pull you closer to par value when risks increase.</p><p>The media narrative can also skew perceptions, conflating highly publicised situations in developed markets with the health of private credit more broadly. Recent headlines around large corporate collapses underline stress in certain corners of US credit, although it is worth noting that independent reviews show private credit exposure to some of the most cited situations has been minimal.⁶ Of course, this does not negate the need for caution, but it does argue for specificity over generalisation.</p><h2 style="font-size: 2rem">Portfolio construction: Sizing, pacing and partnership</h2><p>For institutional investors considering an allocation to emerging market private credit, an obvious starting point is to consider the role you want the allocation to play.&nbsp;</p><p>If the goal is diversification of income and resilience to developed market cycles, even a modest allocation can improve a portfolio. If the goal is to increase total return without taking equity‑like risk, investors should prioritise senior-secured exposures with short tenors, strong collateral and amortising profiles.</p><p>Pacing also matters. Emerging market private credit is capacity constrained for good reasons. Selectivity can give investors an edge. A programmed approach, committing across multiple vintages and allowing capital to be drawn against opportunities on a highly selective basis helps avoid the temptation to chase deployment targets. Partnerships are also critical. In a market where terms and protections are negotiated deal-by-deal, investing with a manager who builds locally, underwrites conservatively and has a track record of workouts should carry the same weight as expected headline returns.</p><p>For those with governance concerns, transparency and measurement are non‑negotiable. Reporting should evidence covenant compliance, collateral coverage, amortisation progress and early‑warning indicators. Where mandates include impact objectives, measurement should focus on specific, auditable outcomes – such as jobs created, megawatts added, tonnes handled – rather than abstract labels. Impact is a by‑product of financing essential assets and services in capital‑scarce markets. It is not a substitute for rigorous underwriting.</p><h2 style="font-size: 2rem">Private credit 2.0: A more segmented and global market</h2><p>During a recent episode of our&nbsp;<a href="/insight/gemcast-episode-1-niche,-global-or-both,-the-future-of-private-credit" data-channel-guid="bf0f72af-7483-48d9-90ec-b2f04a7cd593">Gemcast podcast</a>, I described today’s market as private credit 2.0: a more segmented, specialised and global industry than the one we knew a decade ago.&nbsp;</p><p>The mainstreaming of developed market private credit is not a problem to be solved, but a reality to be recognised. Investors will have to work harder to achieve genuine differentiation. For some, that will mean allocating to niche strategies within the US and Europe. For others, it will mean building an emerging market allocation that seeks to tap into different engines of growth.</p><p>The pivot towards emerging markets is already underway. Coverage in the financial media has noted a steady reallocation of private credit capital from a saturated West towards a range of opportunities across emerging markets. The tone is pragmatic rather than euphoric. Investors recognise the differences, but they also recognise that yield, structure, diversification and impact are more attractive where capital is scarce than where it is abundant.⁷</p><p>My perspective is simple. The most compelling emerging market transactions are not those promising the highest nominal returns, but the ones where the asset is essential, the cashflows are predictable, the security is real and legal control is unquestioned. Get these basics right and you will not need to stretch for complexity or leverage to achieve return targets.</p><h2 style="font-size: 2rem">Diversification as a discipline</h2><p>Private credit has been one of the main winners of the post‑financial crisis era for logical reasons. The asset class matched borrowers’ need for flexibility with investors’ need for income. As it matures in developed markets, the returns and behaviours that once set it apart are converging with public credit and syndicated loans. That does not make private credit less valuable, but it will change where the most attractive opportunities are found.</p><p>The next chapter will be defined by segmentation and diversification, potentially taking investors beyond their comfort zone. Diversifying allocations by manager is unlikely to be as beneficial as having exposure to different economies, business models and legal frameworks. Emerging market private credit is an obvious solution, offering the prospect of higher risk‑adjusted returns, stricter underwriting, tighter covenants, greater lender control and uncorrelated cycles in markets where capital scarcity is a feature rather than a flaw.</p><p>Historically, private credit’s growth has been fuelled by structural change. The same is likely to be true of its future. Demographics, urbanisation, re‑shoring and the energy transition will shape where capital is needed and where it will be rewarded. If the last decade belonged to developed market private credit, the next may belong to those willing to look further afield and allocate to opportunities that reflect the world as it is, not as it was.</p><p><strong>References</strong></p><ol><li>Preqin, Assets Under Management by Region and Date, December 2024.</li><li>S&amp;P Global, Private Credit: The Rising ‘Defaults’, August 2025.</li><li>Lincoln International LLC, Q2 2025 Lincoln Senior Debt Index, August 2025.</li><li>PitchBook, PIK Income Generation of Top 15 BDCs, Q2 2025.</li><li>Internal Gemcorp analysis of Moody’s, S&amp;P historical default data, as of October 2025</li><li>KBRA, Private Credit: First Brands, Public Credit’s Concern, October 8, 2025.</li><li>Reuters, Private credit cash pivots from ‘risky’ West to emerging markets, October 7, 2025.</li></ol><p><br></p><p style="font-size: 12px"><strong>Important Information:</strong></p><p style="font-size: 12px">This content has been prepared solely for informational purposes by Gemcorp (as defined below), is confidential and may not be reproduced.</p><p style="font-size: 12px">This content does not constitute an offer or solicitation of an offer with respect to the purchase or sale of any security and should not be relied upon when evaluating the merits of investing in any securities or form the basis of an investment decision. 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