Not all alternatives are equal: Why private credit is becoming India’s alternative power play

In India’s growing alternatives market, not every “alternative” asset class is the same. While private equity, real estate and venture capital remain prominent, private credit - offered via Alternative Investment Funds (AIFs) is quietly emerging as a standout strategy. As alternatives gain traction among HNIs and family offices, private credit stands out by offering a unique combination of steady income, predictable cash flows, and secured, risk-adjusted returns.

Recent industry reports say private credit AUM reached about $25–30 billion for FY2025 and is projected to more than double to US$60–70 billion by 2028. This growth is not incidental. Private credit fills a structural gap: banks and NBFCs remain conservative on mid-market and bespoke lending, while corporates continue to need flexible capital for acquisitions, working capital, and project funding. Private credit funds step in with customised, asset-backed structures that command premium returns.

The premium charged by AIFs reflects the incremental risk associated with the borrower’s creditworthiness, the quality and accessibility of collateral, the likelihood of recovery in case of default, and the ability to offer bespoke solutions to borrowers with irregular cash flows.

What makes this segment compelling is its predictability. Most performing credit funds target 14–16% returns with cash-flow visibility and strong collateral—first charge on assets, escrow controls, step-up coupons, and promoter guarantees. Unlike PE or VC, where outcomes hinge on market cycles and exit timing, private credit returns are contractual. The caveat one needs to be mindful of is as with most AIFs, lock-in periods are often multi-year and exit options can be limited, reflecting the illiquid nature of the asset class.

Not all strategies are equal

Still, not all private credit strategies are equal - Performing credit is the most stable, offering mid-teens returns with senior-secured structures. Structured credit and real-estate credit offer higher yields but depend more on promoter strength and project execution, and special situations deliver the highest IRRs but require sophisticated underwriting and legal expertise. And there are also a few more nuances to these strategies across the risk-reward spectrum.

But with new AIFs launching every quarter and a wide dispersion in quality, investors need a structured approach to allocation, fund manager selection, and ongoing monitoring.

Allocation must be calibrated based on liquidity needs, risk appetite, and the choice of credit vertical(s). A disciplined approach of diversifying across multiple vintages, fund houses, and strategies allows for yield enhancement without excessive risk concentration.

Manager selection is where outcomes diverge most. The best funds demonstrate strong underwriting DNA, sector knowledge, proprietary deal sourcing, tight covenants, and meaningful GP commitment. Investors should also review their track record, past recoveries, portfolio concentration, deployment pace, and transparency of reporting.

Private credit in India is benefiting from structural shifts: increased entrepreneurial activity, deeper and more sophisticated capital markets, and borrowers looking beyond traditional lenders for capital. For selective investors, private credit offers a compelling blend of yield, controlled risk, and growing strategic relevance.

As India’s alternatives market matures, it is clear that not all alternatives are created equal. For HNIs, family offices, and institutional investors seeking stable, high-risk-adjusted returns in an evolving financial ecosystem, private credit is fast becoming the power play within India’s alternatives universe.

(Rajini Vislavath is Head — Alternatives at LGT Wealth India)

Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.