Private Credit in EMs: A Strategic Portfolio Allocation for Sovereign Wealth Funds

The move into emerging market private credit is not a fleeting trend but a deliberate, portfolio-allocation shift by sovereign wealth funds. Driven by a confluence of yield-seeking and risk-rebalancing imperatives, these institutions are systematically diversifying away from concentrated US exposures and positioning for a more volatile, fragmented global landscape. The scale of this strategic pivot is now quantified, with research showing that 50 per cent of sovereign wealth funds are planning to increase their allocations to private credit this year.

This isn't a marginal adjustment. The leadership of North American SWFs, with an impressive 68% expecting to boost their exposure to private credit in 2025, underscores the mainstream adoption. The sentiment is overwhelmingly positive, with just one per cent of global respondents saying they plan to decrease allocations. This broad-based endorsement signals a fundamental reassessment of how these institutions think about risk and return, viewing private credit as a core tool for delivering differentiated returns amid lasting macro uncertainty.

The decision is being fueled by a tangible market opportunity. A record wave of private credit deals across emerging markets looks set to extend this year, creating a pipeline of opportunities that aligns with SWFs' long-term capital horizons. This surge is not just about finding yield; it's about accessing a market that remains under-penetrated, with emerging markets accounting for just 4% of global private credit fundraising since 2008. For SWFs, this represents a chance to deploy capital where competition is lower and the potential for attractive risk-adjusted returns is higher, all while hedging against the saturation and rising risks in developed markets.

The Capital Stack and Market Tailwinds

The institutional demand for emerging market private credit is being met by a powerful expansion of supply and a favorable macro backdrop. The market's structural capacity is substantial, with direct lenders prepared to deploy about $300 billion this year. This capital is being drawn by a compelling value proposition: rising credit tailwinds from economic growth, attractive yields, and abundant dry powder from private equity and other institutional sources. The asset class offers a durable alternative to traditional bank financing, which is retrenching globally, leaving a funding gap that private credit is well-positioned to fill.

The scale of this opportunity is projected to grow dramatically. The global private credit market, which expanded to approximately $1.5 trillion at the start of 2024, is estimated to soar to $2.6 trillion by 2029. For sovereign wealth funds, emerging markets represent a significant, under-penetrated slice of this growth. These regions now drive over 60% of global GDP growth yet remain underserved by traditional finance, creating a powerful tailwind for private capital deployment. Regulatory reforms in key markets like India, Africa, and Southeast Asia are further unlocking new opportunities, accelerating the shift.

This expansion is not a fleeting event but a multi-year trend. The growth is being fueled by a combination of factors: the retreat of global banks, the return of leveraged buyout activity, and the substantial dry powder-estimated at a record $1.6 trillion for private equity-that is seeking deployment. For SWFs, this creates a unique window to allocate capital where the market is still maturing, competition is lower, and the potential for attractive risk-adjusted returns is high. The setup is one of rising demand meeting expanding supply, supported by a macroeconomic environment that favors the flexibility and certainty private credit provides.

Portfolio Construction and Risk Management

The strategic allocation to emerging market private credit is a conviction buy for sovereign wealth funds, but it demands a disciplined approach to portfolio construction. The high return expectations that drive this move-often cited in the high teens-must be balanced against the need for diversification and rigorous risk management. As Abu Dhabi's Mubadala Investment Co. noted, the focus is now on construction right now and managing risk, not on whether the asset class will perform. This shift from a simple "go long" thesis to a complex portfolio engineering exercise is the hallmark of institutional capital.

Structural risks within the sector are emerging as a key constraint. The very surge in capital inflows is creating a competitive dynamic that pressures terms. Industry figures point to cut-throat competition and concerns over worse loan terms as risks that intensify in saturated developed markets, a dynamic that is likely to spill over into emerging markets as more players arrive. For SWFs, this necessitates a portfolio built on deep due diligence and a focus on quality. The goal is to avoid the "cockroaches" that JPMorgan's Jamie Dimon warned about, by constructing a diversified stack that mitigates concentration risk and ensures each position is backed by robust credit metrics.

Beyond sector-specific competition, the investment landscape is complicated by persistent macroeconomic volatility. Rising geopolitical tensions are a primary driver, with nearly 90% of sovereign wealth funds believing geopolitical competition will be a key driver of volatility. This environment entrenches inflationary pressures and challenges traditional portfolio correlations. In response, SWFs are turning to private credit for its floating-rate exposure and return profiles that are less correlated with public markets. Yet, this very search for diversification adds a layer of complexity. As private market allocations grow, liquidity management becomes a strategic priority, with nearly 60% of sovereign wealth funds using formalised liquidity frameworks to offset the illiquidity of their private credit bets.

The bottom line is that successful deployment requires a multi-layered risk framework. It starts with acknowledging that high returns come with heightened scrutiny of deal terms and counterparty risk. It extends to building portfolios that are geographically and sectorally diversified to weather sector-specific shocks. And it culminates in a macro-aware approach, where the search for less correlated fixed income is balanced against the need for liquidity and the volatility amplified by a fractured global order. For SWFs, the allocation is not a passive bet on growth, but an active, calibrated exercise in managing a new class of risk.

Catalysts and Watchpoints: The Path Forward

The strategic allocation to emerging market private credit is now in motion, but its success hinges on a few critical catalysts and metrics. For sovereign wealth funds, the path forward requires monitoring the pace of deal flow, the quality of partnerships, and the health of the broader market to gauge whether the initial conviction is being validated.

The primary catalyst is the continued expansion of the underlying market. The record wave of private credit deals across emerging markets looks set to extend this year, providing the pipeline of opportunities that justified the allocation. The quality of these deals-measured by borrower credit metrics, collateral coverage, and covenant strength-will be the ultimate test. A surge in volume alone is insufficient; it must be accompanied by disciplined underwriting to avoid the "cockroaches" that JPMorgan's Jamie Dimon has warned about. The sector's under-penetration, with emerging markets accounting for just 4% of global private credit fundraising since 2008, suggests room for growth, but the risk is that capital inflows outpace the availability of high-quality deals, leading to a race to the bottom on terms.

Leading indicators of institutional conviction are already visible in capital deployment announcements and partnership structures. The flurry of activity from funds like Gemcorp Capital Management and Ninety One Plc, which are planning to raise billions for new private credit strategies in 2026, signals strong investor appetite. More telling are the formal alliances being struck. Abu Dhabi's Mubadala Investment Co., a top-performing private credit investor, has deepened its push through partnerships with Apollo, Carlyle, and KKR. Similarly, ADQ has kicked off the year with two global MoUs, one with the World Bank's private finance unit and another with Vietnam's State Capital Investment Corporation. These structured collaborations are not just about capital; they are about sharing risk, accessing local expertise, and building credibility in new markets. The frequency and scale of such announcements will serve as a real-time barometer of SWF commitment.

Finally, the watchpoint is portfolio performance and any signs of stress in the broader private credit ecosystem. Abu Dhabi's Mubadala has stated that its bets are holding up well and that its private credit portfolio has been its top performer for three years. This resilience is a positive signal, but it must be monitored against the backdrop of wider market volatility. The recent $170 million hit taken by JPMorgan on a subprime auto lender is a reminder of structural risks that can spill over. For SWFs, tracking the performance of their own emerging market private credit portfolios and watching for any deterioration in credit quality or rising default rates in key geographies will be essential. Any broad-based stress in the private credit market could compress risk premiums and force a reassessment of the entire asset class's risk-adjusted return profile.

The bottom line is that the allocation is a multi-year bet on a maturing market. Success will be determined not by initial enthusiasm, but by the ability to navigate the transition from a promising opportunity to a sustainable, high-quality source of returns.