“We have seen a steady movement away. Getting government-owned banks to get involved in any kind of financing, be it, regular corporate financing, special situation financing or others, is very difficult. Sixteen out of the 21 public sector banks are under the Reserve Bank of India (RBI’s) prompt corrective action, which restricts them from lending and that’s a dramatic statistic," said Kalpesh Kikani, managing director and senior partner at AION Capital.
The opportunity is clearly getting even bigger and it’s easier for us to launch other parts of our credit business in India, he added.
According to Kapil Singhal, fund manager and co-head Edelweiss Special Opportunity Fund, the opportunity set available for the growth of private credit industry is huge in today’s context.
“Bank credit today, is sitting at around $1.2 trillion and out of which, $800 billion is a relevant for our kind of competition. If you look at the growth of banking, in a good year it has been 15-16%, and in the bad year now, the corporate industrial credit is flat and the credit to services sector has been growing at around 5-6%. Overall, the bank credit which should have grown by about $50-80 billion has come to a standstill. Private equity industry has a stock of at least $40-50 billion that needs to be taken out through IPOs, refinancing or stake acquisition," he said.
Private credit, which today is sitting at about $20 billion, is a very minuscule number, he said. “Suddenly you realize that you are constrained in private credit only in your mind, given where the environment is. There are lot of firms that are trying to set up private credit shops in India, but there is space for everybody," he added.
Industry experts believe that the private credit market in India today has evolved significantly and thus offers a wide variety of opportunities.
“The market has obviously evolved and the opportunities come from various elements. For instance, when the capital markets are down, private equity still needs an exit. One of the other ways to do deals is to help promoters buy back their equity stake by providing financing to them," said Tashwinder Singh, managing director at KKR.
Although there are many players, everyone seems to be very busy, which suggests that opportunity set is much larger than what you have seen so far, he added. “So we are expanding the coverage. As part of our strategy, we have made addition to our structured credit by offering senior secured lending," said Singh.
Other spaces that firms have tapped into include the real estate space, which has seen major interest from private credit investors, and distressed assets, which is currently the opportunity in vogue. “From a balance sheet perspective, we are playing across the spectrum but for third-party capital, our (Kotak Mahindra Bank) balance sheet did not have appetite to take higher real estate credit risk. So we built a significant real estate credit business," said S. Sriniwasan, managing director at Kotak Investment Advisors.
Similarly, right now what we see is the distress opportunity where risk level are more akin to private equity and where, potentially, part of the return is going to come from the ownership of equity, he added.
According to Tarun Bhatia, managing director (investigations and disputes) at risk consulting firm Kroll, the growth in private credit has also meant greater opportunities for intermediaries as private credit lending requires a different kind of due diligence.
“In the mid-market space we see that private credit is replacing private equity. The dynamics in the industry are very interesting and so the diligence is very centric to a specific credit and it’s not generic as typically in equity diligence tends to be," said Bhatia.
Private credit firms take their collateral very seriously and on a periodic basis, our clients ask us to confirm whether the collateral is real and if they are in control, he said, adding that in banking industry, collateral was used more as a concept.
While the opportunity is significant and growth is a given, experts warned that one has to be cautious about how regulations evolve from here on.
“We are at a unique time where the regulator is very keen for private capital to be involved in the lending space, simply because of the pressures on banks’ balance sheets. It will be interesting to see how a regulator, who is inherently prone towards more regulation, is going about all this space, as it is largely unregulated today. So anybody who is involved in the space ought to be thinking not only in terms of how it is today but also how it is going to get regulated tomorrow," said Harsh Pais, partner at law firm Trilegal.
In today’s environment as we have seen, he added, all it takes is one or two incidence of public nature to send the regulators the message to write new set of rules.