Natural Resources 2026 Outlook: Gold and copper remain supported; oil and grains could recover
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Private credit has grown into a roughly US$3 trillion global asset class since the Global Financial Crisis – but it’s now facing its first serious test. In the US, high-profile bankruptcies, a record credit default rate, and the increased use of payment-in-kind (PIK) structures are starting to expose the costs of loose underwriting in this increasingly crowded market. Exposure to AI disruption is adding further pressure. In contrast, dynamics are very different in emerging markets, which are relatively uncrowded and are dominated by asset-heavy, cash-flow generative borrowers.
Last year, two widely publicised failures revealed how recent trends in the US private credit market have allowed borrower distress to go undetected until it is too late. Key among these trends is the growth in ‘covenant-lite’ loan structures, which strip out the maintenance covenants - early warning systems for lenders.
While many considered these failures – of sub-prime auto lender Tricolor and auto-parts group First Brands – to be anomalies at the time, headlines and developments since the start of this year suggest they were early signals of a broader deterioration of credit standards. According to Fitch Ratings, the US private credit default rate reached 9.2% for the 12 months to January 20261, its highest level since the index’s inception, while payment-in-kind2 usage has risen sharply across publicly traded private credit vehicles (BDCs). What we are seeing today are the structural consequences of a market that grew too quickly – where competition has driven down yields and weakened structuring standards in a ‘borrower’s market’.
The US market’s exposure to AI disruption is concentrated in software as a service (SaaS) and business services — sectors where cashflows are less predictable and barriers to entry are falling. For investors, the contrast with emerging markets is increasingly stark.
In emerging markets, lending standards remain high, with lenders able to stipulate robust collateral protections and strong covenants. Deals are often made in collaboration with other banks, and stronger bargaining power allows lenders to take a conservative approach to underwriting deals. Furthermore, the opportunity set is dominated by asset-heavy, cashflow-generative borrowers with limited exposure to sectors most vulnerable to AI disruption.
For example, Ninety One recently provided a senior term loan to fund the expansion of a solar power operator in Brazil. The loan is backed by a portfolio of operating and development-stage solar assets across Latin America, offering robust collateral coverage and a full payment guarantee from the borrower’s US-listed parent company. By focusing on the gaps in physical digital infrastructure and the associated energy demand, we believe the portfolios are aligned with the tailwind of AI disruption.
Alper Kilic, Head of Alternative Credit: “Unsecured term lending in emerging markets is rare, and borrowers tend to have much lower leverage, – typically 3-4x, compared to 6-7x in developed markets – and lower loan-to-value ratios – typically sub-40%, compared to 50-60% in developed markets - alongside durable market positions. In addition, loans are normally structured under US or UK governing law, with leading international legal firms and Big Four auditors involved. This is a very lender-friendly market.”
Today, it is not unusual to see well-known names – including the world’s biggest sovereign wealth funds – as deal sponsors and co-lenders, a clear vote of confidence in emerging market private credit. However, success depends heavily on structuring expertise and local market knowledge.
Nathaniel Micklem, Co-Head of Emerging Market Alternative Debt: “Building on almost two decades of experience, we make sure our investments feature multiple layers of protection. We look for borrowers with low corporate leverage, favour blue-chip market leaders, and structure deals to include robust covenants. Limited competition gives us good bargaining power, while a focus on strong sponsors and markets where infrastructure assets enjoy sovereign support provides an additional level of comfort.”
What makes the emerging markets private credit opportunity particularly striking is where the return premium sits in the capital structure. In US direct lending, achieving attractive yields often requires accepting structural subordination or levering a fund vehicle. In emerging markets, the premium is available at the senior and senior-secured level – a reflection of origination complexity and lender bargaining power; investors are compensated for expertise and access, not for taking on additional credit risk.
“The yield pick-up in emerging markets is significant, despite strong borrower fundamentals. For example, one of our US dollar-based loans – to fund an ambitious EV expansion programme in a Turkish city – provides 200bps more yield than the public bond issuance from the same municipal issuer,” said Matt Christ, Portfolio Manager, Emerging Market Transition Debt.
Private credit in emerging markets is supported by powerful structural tailwinds. Growing populations and rising demand for utilities, goods and services are fuelling financing requirements, with private credit increasingly financing renewable energy generation, digital connectivity infrastructure and electric mobility platforms across the developing world. In addition, the rapid growth of AI is creating new investment opportunities; last year, Ninety One lent to two data centre operators in Latin America that have committed to maintain or increase the share of their energy sourced from renewables to 100%.
Crucially, these sectors benefit from powerful structural demand growth while offering lenders stable cashflows and tangible collateral.
Kilic: “The emerging market private credit opportunity set is inherently asset-heavy – think power generation, transmission infrastructure, water and industrial transition projects. These capital-intensive, physically irreplaceable assets contrast with the asset-light, software services business models prevalent in the US private credit market, which are more exposed to AI disruption.”
Example deals across Ninety One’s platform include:
Martijn Proos, Co-Head of Emerging Market Alternative Debt: “Expanding infrastructure requirements are creating an abundant deal pipeline. And by directing capital towards essential transport, energy, water, urban infrastructure and digital communication infrastructure, investors also contribute to social& economic development and environmental sustainability.”
The inherent complexity of these markets and the years required to build local expertise and origination networks mean competition remains limited, and the premium shows little sign of eroding.
Investors need local-market experience to recognise where risk is mispriced and extensive expertise in deal structuring. Today, only a limited number of investors are seasoned in this space. A broad and deep origination network – something that cannot be bought or created overnight – also helps to ensure diversification and allows lenders to select the best opportunities.
Kilic concluded: “Developed markets private credit has become a crowded trade. In emerging markets, it remains a lender’s market – and that makes all the difference.”
1 Fitch Ratings Private Credit Defaults and Recoveries: 2025..
2 Whereby interest payments are added to the loan balance rather than paid out in cash to lenders