This is in contrast to Emerging Market (EM) Development Finance Private Debt (DFPD): loans to the EM real economy, structured and syndicated by the Multilateral Development Banks (MDBs) and Development Finance Institutions (DFIs). This asset class is supported by the unique dual mandates of the MDBs/DFIs, making sustainable real economy investments with sustainable long-term, risk-adjusted returns. For years, investing in EM private debt assets was perceived as inherently riskier than US private market assets. This assumption is now being challenged.
Why has the Development Finance private debt asset class evolved?
First, asset class data. The current focus on development finance is supported by robust, independent credit data. This was sorely lacking in the past. DFPD credit performance is now publicly reported through the Global Emerging Markets Risk Database (GEMs), a collaborative data platform of 29 MDBs and DFIs. This is the most comprehensive source of long-term credit risk data on private sector and sovereign lending in emerging markets, aggregating decades of loan-level information from MDBs/DFIs, covering defaults, recoveries and loss-given-default outcomes. GEMs data shows that, while default rates in development finance private debt are in line with sub-investment grade credit in the US, recovery rates are consistently higher, resulting in lower credit loss rates. At the same time, due to the rapid growth of the US private credit asset class and its non-transparent market structures, there is a lack of long-term, publicly available performance data, as credit data is opaque, fragmented and based on a shorter track record that coincided with a low-interest-rate period (IMF, 2024).
Second, risk/return stability. MDBs/DFIs operate under a dual mandate: (1) financial sustainability, encouraging them to preserve capital, maintain their high AAA credit ratings, limit losses, ensure balance sheet resilience and avoid reputational risks; and (2) long-term developmental impact, reflected in their lending supporting the SDGs and climate goals. These dual objectives reinforce conservative underwriting standards, rigorous due diligence, long-term planning and ongoing portfolio monitoring and early engagement. This reduces susceptibility to the cyclical overextension observed in the US private credit markets. Including development impact and sustainability in their mandates reinforces credit discipline – but it also justifies increased risk-taking on individual transactions for higher returns within a framework of prudent overall balance sheet management.
Third, MDB/DFI additionality. This is central to the mandate of MDBs/DFIs and embedded in their strategic framework. These institutions provide financing where financial markets are unwilling to do so on their own, or would provide financing at much worse terms (financial additionality). At the same time, they provide the borrower with crucial knowledge or capacity support that they would not obtain from markets (non-financial additionality). This means that they do not crowd out the private sector, and thus are not competing with commercial banks or private investors. Rather, they provide services that are additional to those provided by private markets (MDBs, 2018; IEG, 2023). This mandate means that competition is limited, which can mitigate pro-cyclical volatility. MDBs/DFIs can accurately price projects based solely on the conditions and risks of the underlying asset, and they become less exposed to risk-taking behaviour when excess capital chases investments, leaving the market more vulnerable when conditions worsen – a behaviour often seen in US private credit markets (Kumar, 2025). Additionality also supports the counter-cyclical provision of capital: when available credit markets tighten, demand for MDB/DFI finance grows. MDB/DFI capital is patient and catalytic, stepping in when other markets would usually retreat, ensuring that they have the capacity to stay engaged through crises and economic downturns.
Fourth, high recovery rates. DFPD benefits from structural features and distinct creditor behaviour in periods of stress that enhance recovery prospects and a lower loss-given-default. MDBs/DFIs predominantly lend at the senior level, with covenant protections. In periods of stress, they systematically engage early and focus on structuring, benefitting from their long-standing relationships with borrowers and governments. Combined with patient, long-term capital, this results in higher recovery rates, reduced volatility over the cycle, and lower correlation with the broader credit markets. By contrast, US private credit is driven by financial return objectives within fixed fund lives. In periods of stress, this can encourage faster exits or defensive restructurings, making the asset class more cyclical and volatile (IMF, 2024).
Fifth, low leverage. Corporate, utility and infrastructure projects in DFPD portfolios generally maintain low leverage ratios, reflecting MDBs/DFIs’ conservative structuring and focus on long‑term financial sustainability (GEMs, 2025). In contrast, borrowers in US private credit markets have often been originated with higher leverage. This is justified when rates are low and growth is stable, but becomes a problem when conditions change. Under ‘covenant‑lite’ structures, increased use of payment‑in‑kind (PIK) interest and thinner interest coverage ratios, there is increased sensitivity to macroeconomic changes, as higher interest rates and slower growth translate into debt‑service stress (Cai, Fang and Sharjil Haque, 2024).
Refinancing risk amplifies this issue. Loans in the portfolios of US private credit mainly rely on bullet maturities and refinancing, leaving highly leveraged borrowers at higher risk when capital markets tighten. In some cases, leverage is compounded at the fund level through the use of NAV‑based financing, increasing structural complexity and pro‑cyclicality. DFPD, by contrast, relies on amortising structures, lower borrower leverage and balance‑sheet capital, reducing dependence on refinancing and lowering volatility across cycles.
Sixth, the real economy. DFPD targets real economy sectors, providing long-term financing to financial institutions, corporates and infrastructure and renewable energy projects. It typically only supports private equity investments in the real economy, not leveraged buy-outs, where additionality is hard to demonstrate. By contrast, US private credit is heavily concentrated in sponsor-owned midmarket companies, with significant exposure to software, healthcare and business services. Even within healthcare, lending is frequently linked to software and services rather than asset backed or regulated providers. These borrowers have higher leverage, are more dependent on financial engineering and are increasingly sensitive to macroeconomic changes and tightening.
Portfolio‑level risks resulting from common financing structures such as Collateralized Loan Obligations (CLOs), NAV‑based fund financing and semi‑liquid vehicles increase similar exposures across funds. Together, sector concentration and layered leverage have contributed to rising correlation within US private credit portfolios, increasing pro‑cyclical behaviour and systemic risk. Development finance portfolios, by contrast, tend to remain diversified across sectors and geographies, and are associated with longer‑term capital.
Finally, institutional investors. DFPD is predominantly funded by long-term institutional capital, including pension funds, sovereign wealth funds and insurance companies, and is therefore not subject to redemption risk. This patient capital structure supports counter‑cyclical investment behaviour, as it allows lenders to remain engaged during downturns and prioritise restructurings over exits. As a result, performance is more stable across cycles, with lower volatility and less sensitivity to short‑term changes in investor appetite. By contrast, US private credit is increasingly funded by retail investors and semi‑liquid vehicles, causing a liquidity mismatch between illiquid loan assets and redeemable fund liabilities. Part of the stress observed in US private credit markets is structural: retail‑driven flows, redemption pressures, valuation adjustments and liquidity management constraints can amplify market moves even when the quality of the borrower has not yet weakened. These dynamics increase pro‑cyclical behaviour, forcing defensive actions at the fund level and contributing to greater volatility during periods of stress.