Why SMEs private credit in emerging markets?
The problem According to the IFC, small and medium-sized enterprises (SMEs) account for nearly 90% of businesses worldwide. However, in emerging markets, up to two-thirds of these SMEs face significant challenges in securing the financing they need. This shortfall results in an estimated $5 trillion financing gap.
Under frameworks such as Basel III, banks are required to meet stricter capital and solvency requirements, limiting their ability to lend to segments perceived as higher risk, particularly in volatile economies. This is not due to a lack of willingness on the part of banks but rather regulatory constraints that make lending to SMEs more costly or complex.
For many SMEs, accessing public debt markets or institutional sources of capital is prohibitively expensive and difficult. Credit ratings, extensive financial disclosures, and high liquidity thresholds are often required, excluding smaller companies without the scale or resources to meet these demands.
The opportunity Private debt in emerging markets offers potentially high returns—sometimes exceeding 15% net IRR—compared to the typical 8–12% range in developed markets. Several factors explain these higher yields:
Tailored structures. Private financing allows for direct negotiation of covenants and guarantees, achieving terms that are specifically adjusted to the risk profile of each SME.
Illiquidity premium and lower competition. Since private debt is not publicly traded, it requires a longer-term capital commitment, and fewer participants compete in this space, further driving potential returns.
Flexibility in rising interest rate environments. Many private loans have floating interest rates, making them attractive when official rates rise, offering an edge over traditional fixed-income instruments.
Moreover, private debt can serve as a bridge to broader capital markets. As SMEs engage with private investors, they improve their transparency, corporate governance, and reporting practices, all of which are critical for accessing public or larger institutional markets in the future.
Resilience and diversification Investors in private debt often report stable returns, even during periods of economic volatility. Additionally, private debt typically has a low correlation with traditional asset classes—such as publicly traded equities and government bonds—making it a valuable tool for diversifying risk and strengthening portfolio stability.
The role of fintech and alternative platforms Today, fintech solutions and alternative financing platforms are also playing a role in closing the financing gap. These platforms streamline processes like loan origination, risk assessment, and distribution, making it easier for SMEs to access private capital, though their presence remains limited in many emerging markets.
Collaboration with banks Rather than displacing banks, private debt can complement them. In many cases, co-investment models or hybrid structures arise, where private investors and banks share risk and expand coverage for credit demand. This benefits SMEs by increasing their financing options and institutional investors by diversifying their portfolios.
ESG and inclusive development An increasing number of private debt funds and platforms incorporate ESG criteria, channeling resources into companies committed to sustainability and social impact. For many SMEs in emerging markets, this financing not only drives business growth but also supports job creation, economic formalization, and the strengthening of local productive ecosystems.
Key takeaways
There is a $5 trillion financing gap for SMEs in emerging markets, exacerbated by stricter capital requirements imposed on banks.
Private debt offers a flexible and potentially more profitable solution while also preparing SMEs for greater access to capital in the future.
This segment provides diversification opportunities for investors, and with the contribution of fintech solutions and bank collaboration, it can expand credit access more equitably.
By integrating ESG criteria and promoting improved corporate governance practices, private debt not only seeks financial returns but also fosters sustainable growth and economic inclusion in emerging markets.
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