How Private Credit funds can help navigate market uncertainty

Markets, for all their noise and movement, are cyclical in nature. Optimism builds gradually, peaks, and then, often without warning, gives way to unease. At the time of global market volatility, investors, particularly those who have already played the equity cycle, are asking a different question: where can I find relatively steady, risk-adjusted returns without being affected by global sentiment swings?

For those who’ve worked across asset classes, through crisis and calm, the answer lies in the private credit space, more specifically, in well-structured Alternative Investment Funds (AIFs) that are linked to India’s real economy.

Over the last two decades, private credit AIFs have evolved from a niche concept into a recognised investment avenue. The global economic crisis in 2008 was a turning point for the private credit market. It led banking regulators to impose stricter norms for lending to reduce the likelihood of similar crises in the future. This encouraged private credit to fill the gap in the small & mid-market lending space. The assets under management in private credit, which were below US$400 billion prior to the global economic crisis, rose to over US$2 trillion by 2023.

In India, the market gained momentum mainly in the second half of the last decade. Till the early 2010s, banks played a significant role in credit growth, but conditions changed in the mid-2010s when there was an increase in bad loans in the banking sector. Despite the RBI’s efforts to mitigate the crisis, bank lending to corporates did not fully recover, creating opportunities for private credit funds to expand.

NBFCs were initially the preferred option for promoters looking for loans on flexible terms. However, this changed after the default crisis in 2018, which widened the demand-supply gap in India’s enterprise credit, creating another trigger for growth in private credit. Assets under management for the private credit market in India increased from about US$8.4 billion in 2018 to US$20.6 billion in 2023.

Market uncertainty

Over the past few years, financial markets have experienced high volatility due to factors like Covid-19, geopolitical tensions, and uncertainties caused by macroeconomic and trade policies.

At times of market stress and economic uncertainty, portfolio companies in the private credit space may experience a moderation in earnings or asset-liability mismatch temporarily. However, what distinguishes private credit funds is their ability to generate predictable outcomes in uncertain environments. Private credit managers maintain relationships with borrowers or investee companies, enabling smoother coordination in working out loan repayments.

The risk becomes lower as most private credit funds offer senior secured debt, often enhanced by underwriting. Senior secured debt ensures the highest probability of repayments as it holds the first priority in case of a default, making private credit funds potentially less vulnerable during economic stress.

Private credit vehicles can also provide support to borrowers during challenging market conditions. During economic downturns, banks and traditional non-bank lenders become more selective in lending to small and mid-sized corporates. This creates opportunities for private credit managers to fill the gap. Borrowers may approach private credit lenders due to the availability of tailored lending solutions suited to their needs.

Conclusion

As India’s economy develops and diversifies, investment strategies are also evolving. The sources of growth are shifting from urban centres to smaller regions, from conventional banking to structured credit, and public markets to private enterprises. In this environment, private credit AIFs offer investors a way to participate in India’s next phase of economic growth while aiming to manage exposure to volatility.

Note to the Reader: This article is part of Mint's promotional consumer connect initiative and is independently created by the brand. Mint assumes no editorial responsibility for the content.