Emerging Market Private Debt Impact Investing

Direct lending that drives sustainable development

In Emerging Markets, providing direct loans to profitable, cash generative businesses with high quality management teams can deliver attractive, market rate returns while making a significant contribution to sustainable economic development though creating jobs and supporting local value chains.

The Emerging Market Private Debt Opportunity

Emerging Markets are projected to be the dominant engine of global growth in the medium term, providing a wealth of opportunity for direct private capital investment, in Golding’s view. However, the large and growing financing gap for companies in Emerging Markets can act as a constraint to both economic activity and sustainable development. Structural underdevelopment of local banking sectors, and the relative scarcity of private capital contribute to a financing gap for Emerging Markets companies that is between US$700 billion and US$830 billion per year according to the International Monetary Fund (IMF).

Golding believes that these constraints mean that there are many cash-generative, growing corporates in Emerging Markets that do not have sufficient access to credit. By providing finance to these businesses, Golding believes that direct private debt investments can catalyze improved economic outcomes for both borrowers and individuals.

Key Attractions of the Asset Class

1. Attractive yields in a low interest rate environment:
Direct lending in Emerging Markets offers attractive yields through contractual returns paid in cash. Yields can be further enhanced through pay-in-kind interest and cash settled upside participation features such as revenue or profit share.

2. Security through collateral:
Private Debt extended to Emerging Market borrowers is typically accompanied by strong financial and non-financial protections and secured with collateral.

3. Focus on Repayment and FX: 
FX and refinancing risks can be minimized when private debt strategies focus on borrowers with hard currency revenues that can repay debt on an amortizing basis. 

4. Diversification: 
Private debt has a low correlation with other asset classes and typically offers lower volatility of returns when compared to other asset classes.  This makes it an attractive addition to an efficient portfolio. 

5. Sustainable Economic Development and positive Impact:
Golding believes that addressing the financing gap in Emerging Market helps to foster on job creation and ‘onshore’ economic value. This generates positive externalities and economic growth, contributing to several of the UN Sustainable Development Goals.

Our expertise

Golding Capital Partners is building a team of specialists that brings a wealth of experience in Emerging Markets, debt and impact investing. The team have all spent time living and/or working in Emerging Markets. This has enabled them to develop strong professional and personal networks, enabling a unique understanding of the opportunity set.

Direct lending in Emerging Markets also entails risks

Please note that a direct lending in Emerging Markets also entails several risks. 

  • It cannot be guaranteed that the strategy will achieve the expected financial outcomes. Expected outcomes may differ from historical and forecast outcomes, neither of which guarantee any success in the future.
  • In a direct lending strategy, there is no guarantee that the borrower will always fulfil its contractual payment obligations. A partial or total default of the borrower might negatively affect the success of the strategy.
  • The investment strategy focuses on Emerging Markets with a special focus on Africa. Political and macroeconomic risks in these regions are higher than in developed economies. Compliance risks associated with borrowers are also be higher. These factors may affect the success of the strategy. 
  • The finance providers do not have any direct controlling interests over the borrowers and the power to take efficient countermeasures on the borrowers’ level are limited. Mismanagement on the borrowers’ level might negatively affect the return on investment. 
  • There is no guarantee that the regulatory and/or the tax environment – also with retroactive effect – will not change during the term of the investment. A change of the regulatory and/or tax environment might result in additional financial burdens, which might negatively affect the return on investment.
  • An investment in direct lending in Emerging Markets involves the risk of a total loss of the invested capital. Hence, an investment is only suitable for investors who can bear a total loss of the entire invested capital. 

Please note that the risks listed above are not exhaustive and therefore, an investment decision cannot be based on this summary. Before making an investment, the investor shall consider its individual situation and shall carefully read the detailed description of the risk factors, which can be found in the Private Placement Memoranda for the specific investment programs.