Invest for good: how private debt can add diversification, resilience, and impact to your portfolio


Private debt in emerging markets is a powerful asset class to add resilience, impact and diversification to an investment portfolio though it may be daunting for investors to access and understand. David Grimaud, Chief Executive Officer of Symbiotics Asset Management, explains why in this insightful article.

What are the current challenges for emerging markets?

Emerging markets have been developing at a breathtaking pace over the recent decades, and improvements in the livelihood of their residents have been massive: 99% of the Indian population now has access to electricity, up from 59% in 20001. GDP2 per capita at purchasing power parity increased from USD 4,300 to USD 15,000 in the same period3; and the development of mobile money has allowed millions of people to access financial services for the first time.

Challenges persist nonetheless: women still experience greater difficulty than men in obtaining financing and employment, the quality of education still requires improvement in many developing countries, and with rampant development comes environmental pressure. And it is estimated that 1.6 billion people still lack access to financial services4.

The flow of capital to emerging countries is currently not enough to solve these issues. According to the OECD5, the Sustainable Development Goals (SDGs) financing gap in developing economies reached USD 4.2 trillion in 2021, up from USD 2.5 trillion before the Covid pandemic struck6. The good news is that investors could jump in fairly easily: just 1.1% of global private capital (USD 380 trillion) would suffice to fill the SDG financing gap in emerging markets7. Investing in private impact debt can contribute to this goal, while providing investors with true diversification and return potential.

How do you reconcile social and environmental progress with financial returns?

Private impact debt has come a long way since its beginnings in the early 2000s. According to the 2022 Tameo Private Assets Impact Survey8, it now represents an investable universe of over USD 32 billion, covering sectors such as microfinance, SME9 financing, clean energy, fintech, education and agriculture. With exposure to the real economy, the asset class has demonstrated remarkable long-term resilience. The SMX MIV (USD) index, an index of impact debt funds, has performed negatively in fewer than 10 months since its launch in 2003 and generated an annualised return of 3.4%.  Despite periods of tremendous geopolitical turmoil, like the 2008 global financial crisis or the Covid pandemic, the sector rebounded quickly.

Is private impact debt sensitive to global markets?

Another defining feature of impact private debt is its capacity to act as an effective portfolio diversifier. The loans in our portfolios benefit from a double layer of protection versus global markets. Firstly, frontier markets have historically shown lower correlation to the global economy; and secondly, we are predominantly exposed to local small and medium businesses rather than large corporates. Private impact debt is therefore weakly correlated with major market indices.

This holds true not just for global bond or equity markets, but also for listed emerging market debt: since the inception of the SMX MIV index, correlation with the JP Morgan EMBI Global is around 0.19. The economic and geopolitical turmoil of 2022 put this quality to the test, and impact private debt passed with flying colours. Whilst most major asset classes posted double-digit losses over the year, impact private debt remained firmly in positive territory.

How can local currency investing add value for investors?

At first sight, adding unhedged local currency exposure to impact debt portfolios seems counterintuitive. Historically, emerging market currencies have been sensitive to capital controls, economic shocks and geopolitical turmoil. Since we started including local currency exposure to our portfolios in 2013, we have noticed that it can add return potential to a portfolio, while keeping risk in check. We carry out rigorous macroeconomic analysis and apply a highly diversified exposure at all times – today, we invest in more than 30 currencies across Latin America, Africa, and Asia. This approach paid off in 2022 when most emerging market central banks promptly adjusted monetary policies to mitigate the effect of rising global yields and unhedged local currency mandates performed better than their hedged counterparts. We believe this trend will be supported by stronger medium-term economic growth rates in the developing world.

Local currency debt also enhances the impact of our portfolios. Portfolio companies do not need to manage the exchange rate risk or cost of hedging the loan, which allows more money to flow to those who need it most.

How important is impact for you?

First and foremost, Symbiotics Asset Management invests 100% of its clients’ money in impact investments10. Since our debut in 2005, our due diligence processes and risk methodologies have assessed investment opportunities from both a financial standpoint and also an ESG standpoint. We think it is a positive development that impact is now high on the agenda of financial regulators and institutional investors across the world. It is important to note that all our products comply with article 9 of SFDR, the new European regulatory framework for sustainable investing. We also share industry concerns for greenwashing. As reported by Morningstar, SFDR Article 9 funds saw assets shrink by EUR 175 billion in just the last quarter of 202211. This is mainly driven by the realisation by some asset managers that they are unable to prove the sustainable nature of all their investments and, as such, meet the SFDR article 9 reporting requirements.

At Symbiotics Asset Management, we strongly believe that a robust impact methodology is key to maintaining trust and continuous commitment from investors. For this reason, we have always included impact at every stage of our investment process. All our portfolio companies benefit from an internal ESG rating, all loans and bonds we invest in commit to a formal SDG target, and all our portfolios report on a wide range of impact indicators.

What should investors consider before investing?

Private debt in emerging markets is a powerful asset class to add resilience and impact to an investment portfolio, though it may be daunting for investors to access and understand.

It is important to work with an expert in the field, who can advise and guide investors to navigate the complexity of selecting high-quality portfolio companies in emerging markets; deal with the intricacies of local currency investing and build efficiently diversified portfolios. It is also key to measure and report on ESG and impact indicators using a robust and transparent methodology.

David Grimaud, CEO, Symbiotics Asset Management

1Source: Our World in Data
2Gross Domestic Product
3Source: World Bank, GDP per capita at purchasing power parity, current prices

4 Source: IFC, EM Compass 109, January 2022

5Organisation for Economic Co-operation and Development
6 Source: “Global Outlook on Financing for Sustainable Development 2021: A New Way to Invest for People and Planet”.​
7Source:  OECD UNDP Scoping note for the G20 Development Working Group, 31 March 2021.

8The report can be downloaded here:
9Small and Medium-sized Enterprises
10Source: Symbiotics AM, Bloomberg, Tameo
11 Symbiotics Asset Management internal source, communicated on January 2023