Mobilising private credit for emerging markets: from financing gap to investment opportunity test

At a time when global capital is abundant yet unevenly distributed, one of the clearest mismatches in financial markets is the scarcity of debt financing available to emerging economies. This shortfall isn’t just an economic concern – it’s a barrier to long-term development and sustainability.

Dozens of developing nations face rising debt pressures, while the funding required to meet the UN Sustainable Development Goals runs into trillions of dollars annually1. Emerging markets – many of which are on the front line of climate risk and ecological degradation – also remain underserved by private capital. The result is a persistent financing gap; and private credit has a critical role to play here.

Closing the financing gap

We believe access to long-term, appropriately structured credit for emerging markets can support everything from sustainable infrastructure, including energy systems, water, healthcare and education, to nature conservation projects. Yet traditional lenders have retrenched in the face of regulatory constraints, capital requirements and perceived risk.

Private credit may offer a different model. By providing tailored, often longer-term financing, it may be able to address those gaps where conventional lenders fall short. Its flexibility allows it to meet the needs of sovereigns, corporates and projects that could otherwise struggle to access capital.

Importantly, this is not simply about increasing the supply of funding. It’s about improving the quality and suitability of that financing – aligning repayment structures with project timelines, supporting growth sectors, and enabling borrowers to deploy capital where it is needed most and will have the greatest impact.

Supporting climate solutions

We believe emerging market economies are pivotal to achieving global climate goals, both because of their exposure to physical risks and their role in future emissions trajectories. Many are also home to critical ecosystems and biodiversity that underpin global environmental sustainability.

Climate solutions and related infrastructure, however, require substantial upfront capital. The absence of affordable financing has become one of the main barriers to implementation.

Private credit may help unlock this bottleneck. By directing capital towards climate-aligned projects and sustainable infrastructure, this asset class can support both mitigation and adaptation efforts. Innovative structures – such as debt conversions – demonstrate how financing can be directly linked to environmental outcomes, refinancing existing obligations while freeing up resources for conservation investment. Such transactions also have the potential to offer an economic benefit, in our view, with the restructuring of borrowing supporting overall credit quality and reduction of debt for the sovereign in question.

Such models highlight an important evolution: capital is no longer just a source of funding, but a mechanism for delivering measurable impact. For investors, this creates the possibility to align the potential for financial returns with sustainability objectives. 

Broadening the opportunity set

One of the most compelling aspects of emerging market private credit is the diversity of structures available to investors.

Generally speaking, countries with the greatest fiscal need are often sub-investment grade in nature, meaning the cost of debt is often high. However, the use of credit enhancement – via mechanisms provided by multilateral institutions or insurance providers – is designed to elevate the quality of underlying exposures. This can create pathways for institutional investors to access emerging market debt within required risk parameters.

At the same time, we see a growing market for unwrapped credit – a form of lending without such mechanisms. While this carries higher risk, it can also offer the potential for enhanced returns and greater flexibility in structuring over the longer-term. 

A third and increasingly important segment is more impact-focused financing. Here, capital is explicitly tied to social or environmental outcomes, whether through sustainability-linked loans, development projects or blended finance structures. These investments aim to deliver both financial performance and measurable progress against development or climate goals.

A compelling investment case

Taken together, these approaches point to a broader conclusion: emerging markets private credit is not simply a solution to a funding problem, but a maturing asset class. 

For investors, we believe the appeal may lie in several factors. The opportunity to deploy capital into underpenetrated markets can offer the potential for diversification alongside attractive risk-adjusted returns. The ability to structure transactions can help provide greater control over risk and cashflow characteristics, while the growing emphasis on sustainability adds an additional dimension of value.

Of course, challenges remain. Perceptions of risk, regulatory complexity and limited market infrastructure continue to constrain capital flows. But these barriers are increasingly being addressed through innovation in deal structuring, partnership with development finance institutions, and the gradual deepening of local financial systems.

From gap to opportunity

The case for mobilising private credit in emerging markets is therefore both urgent and compelling, in our view. The financing needs are vast, and the consequences of inaction are significant.

Yet within this challenge lies a clear opportunity. We believe by deploying private credit at scale, investors could potentially help bridge the financing gap and support sustainability over the long-term.

In a world searching for both yield and impact, emerging markets private credit may offer a rare alignment of the two.

Key Risks

It should be noted that diversification is no guarantee against a loss in a declining market. Past performance is not a guide to future performance. For Professional Clients only. The value of an investment and any income taken from it is not guaranteed and can go down as well as up, and the investor may get back less than the original amount invested. The details contained here are for information purposes only and do not constitute investment advice or a recommendation or offer to buy or sell any security. The information above is provided on a general basis and does not take into account any individual investor’s circumstances. Any views expressed are those of L&G as at the date of publication. Not for distribution to any person resident in any jurisdiction where such distribution would be contrary to local law or regulation.

This financial promotion is issued by Legal & General Investment Management Ltd. Registered in England and Wales No. 02091894. Registered office: One Coleman Street, London EC2R 5AA. Authorised and regulated by the Financial Conduct Authority.