Why Emerging Markets are Finally Outperforming Developed Markets | Robert Koenigsberger | Gramercy

Episode Summary

Executive Summary: Robert Koenigsberger argues that emerging markets have matured from a chaotic, niche debt-trading arena into a more disciplined, policy-resilient asset class. He says the best EM opportunities come from selective underwriting, structure, and governance—especially in private credit—rather than benchmark-driven allocation. He contrasts EM’s institutional, senior-secured approach with overheated developed-market private credit, and highlights asymmetry in places like China property and Venezuela.

Main Topics: Evolution of emerging markets (Priority: 5/5): Koenigsberger traces EM from the 1980s sovereign debt crisis and inter-dealer trading to a broader, more institutionalized market with many investable subsegments. Why EM has outperformed (Priority: 5/5): He says recent EM strength reflects both repatriation/diversification away from the U.S. and a fundamental re-rating of relative value after years of underperformance. EM debt vs EM equity (Priority: 4/5): He argues investors can often get equity-like returns through EM debt and structured private credit while taking less risk, especially through dollar-denominated lending and collateralized structures. Policy convergence and central bank credibility (Priority: 4/5): He emphasizes that EM policymakers often acted faster than developed-market peers after COVID, making DM look more like the old EM in terms of inflation discipline and resilience. Private credit opportunity in EM (Priority: 5/5): Koenigsberger sees EM private credit as solving market failures in places like Turkey and Mexico where banks cannot or will not lend, with strong risk controls and governance improvements. Alpha through active, non-benchmark investing (Priority: 5/5): He strongly rejects index-based EM investing, arguing that market-cap-weighted benchmarks can force investors into the worst risks and obscure true asymmetry. Governance, restructuring, and catalytic investing (Priority: 4/5): He explains how Gramercy uses covenants, creditor coordination, and restructuring expertise to protect downside and create upside in distressed or opportunistic situations.

Key Arguments: EM is no longer just an opportunistic satellite asset; it has become a legitimate strategic allocation with many sub-markets. A lot of recent EM outperformance came from both weaker U.S. sentiment and genuine relative-value repricing after years of neglect. EM debt can deliver low-double-digit or even equity-like returns without taking equity-style currency and governance risk. Local-currency EM debt returns were driven roughly half by currency and half by rates last year. EM central banks, especially post-COVID, acted faster and more decisively than developed-market central banks. Benchmark-driven EM investing can be dangerous because market-cap weighting can overexpose investors to the riskiest issuers. True alpha in EM comes from underwriting what you own and what you do not own, not from passive exposure. Private credit in EM often addresses real financing gaps left by banks, especially for suppliers and family-owned businesses. Structuring matters: dollar revenues, dollar collateral, senior secured positions, and legal jurisdiction reduce downside. Governance is part of the return: Gramercy uses lending discussions to push borrowers toward better reporting, boards, and IPO readiness. Distressed investing requires asymmetry; something is not attractive just because it is cheaper than before. Some situations are truly uninvestable, especially when sanctions like OFAC apply. Creditor coordination and restructuring expertise can materially improve outcomes in sovereign defaults and corporate distress. Developed-market private credit faces liquidity mismatch and crowding; EM private credit avoids much of that because it stays institutional and more disciplined.

Data Points: Years of experience in EM investing: ~39 years - Koenigsberger says he has been investing in emerging markets since the mid-to-late 1980s. Gramercy history: 28 years - He references Gramercy’s long operating history in building creditor groups and restructuring expertise. Argentina weight in EM bond index: 18% - He cites Argentina’s large benchmark weight in the late 1990s as an example of index risk. China property opportunity: 5 cents to 15 cents - He says select China property securities could potentially triple from distressed levels. Turkey lira move: 1.5 to 7 to 12, later 44 - Used to illustrate currency collapse and why dollar lending/collateral matters. Local market EM debt performance: Outperformer last year - He notes local EM debt markets were the standout performance area in EM debt. Currency/rate contribution to local debt returns: About 50/50 - He estimates roughly half of last year’s local EM debt return came from FX and half from rates. Typical EM equity return expectations: 10% to 12% - He suggests equity investors in EM are often aiming for low-double-digit returns. Typical private credit hold period: 2-3 years - He says EM private credit structures are usually not long-dated like 10-year private credit vehicles. EM drawdown in dislocations: ~27% peak-to-trough on average - He says EM debt dislocations typically fall about this much over roughly five months. Post-dislocation recovery: 30% to 50% up in 12-24 months - He says EM debt has historically recovered strongly after dislocations. EM debt dislocations: 13 - He notes EM debt has experienced about 13 major dislocations over 35 years. EM private credit yield advantage: ~10% more yield than public market - He claims private credit can offer materially higher yield for giving up liquidity. Russian assets during 1998-99 crisis: 100 cents to 6 cents - He uses Russia as an example of a classic restructuring opportunity. Argentina restructuring example: 66 2/3% haircut - He references Argentina’s restructuring terms and attached GDP warrants. Venezuela trade levels: single digits/low double digits to 35-50 - He says some Venezuelan claims were bought cheaply after restrictions and later recovered materially.

Pivotal Quotes: "EM is not risky. The approach that people have taken to EM is risky." — Robert Koenigsberger: He is arguing against blanket risk labels and in favor of active, beta-agnostic underwriting. "We want to capture substantially all the upside that's in the market and limit the downside." — Robert Koenigsberger: He describes Gramercy’s barbell strategy and overall portfolio objective. "If you can buy an asset when it's restricted... there tends to be a lot of supply at the same time." — Robert Koenigsberger: He explains the opportunity created by sanctions/restrictions in markets like Venezuela, while distinguishing legal and illegal investability.

Implications: For investors, EM is best approached as a selective, structure-driven opportunity set rather than a passive benchmark trade. The interview suggests EM private credit may offer attractive yield, governance influence, and better downside control than crowded developed-market private credit.