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Phenix Capital: Private debt funds provide vital path for impact investment

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Published: 5 July 2024

In a new report, the consultancy highlights how private debt funds continue to support growing companies in emerging markets, with the total target size of funds currently open for investment standing at €44bn. 

Private debt impact funds can provide a lifeline to growing companies in emerging markets, which may be too small to qualify for bank loans, but too big for microfinance | Petri Oeschger on iStock

The overall number of private debt funds focused on impact has risen only slightly over the last year. Foundations continue to lead the way, but there has also been a sharp climb in allocations from funds of funds participating in the sector, according to research from Phenix Capital.

The Amsterdam-based investment consultancy says in its latest report that a total of 394 private debt impact funds now feature in its Impact Database – some 14% of the total number of funds there – compared to 358 listed in its June 2023 report. Of those 394 funds, 117 are open for investment from a total 218 investment managers operating private debt strategies.

The total target size of funds open for investment stands at €44bn. That compares with €50bn in total capital raised towards private debt funds. Phenix Capital records a near-250% growth in the number of private debt impact funds since 2014

Some 70% of the total have an emerging-markets focus, reflecting the popularity of this type of investment when it comes to developing economies. The report notes that many impact investors prefer a private debt strategy as a gateway to emerging markets, rather than going via, for example, the private equity route, because of the typically regular cash flow, lower volatility compared to equities, and the relatively stable returns on offer.

The strategy is also seen as working well from an impact perspective, as private debt impact funds often provide a lifeline to growing companies in emerging markets, which may be too small to qualify for loans from banks or public markets, but too big to be of interest for microfinance organisations. Those beneficiary companies receiving loans can then  benefit from tailored credit solutions and  flexible funding structures, while not diluting their shareholdings or ceding control to investors, as may happen with equity investment.

Private debt is typically a long-term impact strategy, with investment remaining locked up for long periods. As such, the investor base has traditionally been led by foundations, due to their long-term investment horizons – they comprise 19% of private debt impact funds on the database. They are followed by fund of fund managers (11%), banks (10%), pension funds (9%) and development finance institutions (8%). There has been a notable increase in allocations by funds of funds, which have increased by 63.6% since 2023, compared to a 16.7% increase for foundations and a 5.9% decline in private debt allocations by corporates. 

In terms of regional distribution, 30.7% of private sector impact funds are focused on Africa, while 23.9% focus on the next most popular region, Asia.

Phenix Capital notes that the emerging market bias of private debt funds is illustrated by the the  number of funds focused on various UN sustainable development goals (SDGs). No Poverty (SDG1) is targeted by 203 private debt funds, while Climate Action (SDG13) is targeted by 81 funds.

Interesting initiatives

One notable recent Asian development highlighted in the report was the launch of an Asia Pacific Credit strategy to tap Asia’s fast-growing private credit market by Tikehau Capital and Singapore’s UOB-Kay Hian in February.

In terms of climate-related initiatives, an agreement in October between British International Investment and Amsterdam-based ILX Management to co-finance up to $500m of debt transactions across Africa, Asia, and the Caribbean was among those that stood out for Phenix Capital. 

Another was the launch in April 2023 by Climate Fund Managers and Cardano Asset Management of the Cardano CFM Emerging Markets Climate Credit Fund, a $1bn-target private credit fund  focusing on renewable energy opportunities.

Meanwhile, the consultancy noted that investment by Temasek and the European Investment Bank coinciding with last November’s COP28 climate conference provided a boost to LeapFrog Investment’s new climate strategyfocused on generating up to$500m of investments in companies that provide green tools and technologies in Africa and the emerging markets of Asia.

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