Emerging market infrastructure debt: a sizeable funding gap, fitting for private investor participation

Sarah Miller

Senior Vice President, Manager Research
(Monday, Jul, 24, 2023)
|   3 mins

Co-authored by Celine Grace Legaspi

Emerging market (‘EM’) infrastructure debt finances the build and/or operation of essential infrastructure projects within EM countries. Such projects include telecommunications, energy, transport, utilities, and social infrastructure.

As an asset class, it’s valued at $500-600bn globally and is forecast to double over the next three to four years1, driven by secular trends, including rising populations, changing demographic profiles, and a growing need for essential services.

The potential benefits of investing in EM infrastructure debt include:

  • Investment premium: Potential illiquidity and complexity premia over developed market infrastructure debt, with a relatively lower risk than EM infrastructure equity.
  • Being inherently impactful: Support social and economic mobility alongside environmental sustainability within EM countries.
  • Predictable, inflation-protected income: Cashflows are known and stable and revenues of underlying assets are typically indexed to inflation.

What is the opportunity set?

There’s a critical need for infrastructure investment globally – with a demand for $94 trillion worth of investment by 2040 to keep pace with material economic and demographic changes across developed and emerging markets2. At present, Africa, South Asia, and Latin America face an infrastructure funding gap equivalent to 6.5%, 3.3%, and 1.1% of GDP, respectively3.

While we’ve seen a rapid increase in private participation in infrastructure (‘PPI’) to address some of this demand – Africa, South Asia, and Latin America have seen 10-year compound annual growth rates (‘CAGRs’) of 10.5%, 9.4%, and 8.8%, respectively4, as shown in the chart above – the funding gap between high-income and low/middle-income countries remains significant. In 2021, 80% of private investment in infrastructure went to high-income countries5.

How can investors help plug this funding gap?

EM infrastructure debt remains a relatively nascent asset class (accounting for only 8% of global infrastructure debt AUM6), with few products currently available to investors. As highlighted above, we believe that this is driven by a lack of investor demand rather than a lack of opportunity. Where such products are available, they’re predominantly accessed via closed-ended pooled funds or segregated mandates.

Fund managers in this asset class tend to have a preference to be senior in the capital structure, secured by asset collateral and prioritised for repayment – offering relatively lower risk. However, some fund managers offer limited junior and/or mezzanine debt exposure to clients comfortable taking on more risk.

Beyond debt seniority, EM infrastructure debt solutions also vary based on region and sector, where managers pursue either focused or diversified strategies. For example, some fund managers might solely invest in renewable energy projects, while others might invest across a range of sectors but focus on a particular region, such as Africa.

Are there any risks I should be aware of when investing in EM infrastructure debt?

As with any investment, there are potential risks to be aware of. The risks to consider when investing in EM infrastructure debt include political, regulatory, legal, currency, construction, and default risks.

However, there are several forms of potential downside protection available, given the investment is structured appropriately, to help mitigate these risks, such as:

  • Guarantees: This can ensure that the lender receives a minimum level of revenue and is often backed by the government or development finance institutions (‘DFIs’).
  • Insurance: This can be used to cover certain losses. Political risk insurance is commonly used in higher-risk jurisdictions for EM infrastructure debt deals.
  • Step-in rights: In the event of default, the lender has the right to appoint a new engineering, procurement and construction contractor (in the case of a greenfield project) or operator (in the case of a brownfield project).
  • Working with high-quality counterparties: High-quality counterparties like DFIs can help reduce the default risk of deals.

As with most EM investments, it’s critical that the manager has real and extensive experience in structuring, documenting, and applying these measures in the respective markets.

Key takeaways

There’s a considerable funding gap within EM infrastructure debt, and private investors have the potential to benefit from predictable, diversified, and inflation-adjusted returns, all while contributing to their sustainability and social impact objectives. Given the complexity and esoteric nature of this asset class, selecting an experienced manager with extensive local knowledge is critical.

For more information on this asset class and whether it might be a good fit for your portfolio – or for help selecting a suitable fund manager – please get in touch.

*PPI stands for Private Participation in Infrastructure and refers to infrastructure funding from the private sector.


1 ImpactA Global (2022). Management Presentation.

2 Global Infrastructure Outlook (2018). Global Infrastructure Outlook: Infrastructure investment needs.

3 Fay, Martimort and Straub (2021). Funding and financing infrastructure: The joint-use of public and private finance. 

4 The World Bank (2021). PPI Visualization Dashboard.

5 Global Infrastructure Hub (2022). Infrastructure Monitor 2022: Global trends in private investment in infrastructure.

6 Preqin (2022). Assets Under Management: Infrastructure debt.


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