How is private credit reshaping investment opportunities in the Indian market?

Private credit has emerged as a growing asset class in the Indian financing market today. Most private credit platforms have flexibility in structuring credit solutions to meet the specific requirements of individual borrowers, can take on riskier exposure and mobilise capital quickly. 

Private credit has consequently become the “go to” solution for many mid-sized, growth stage or slightly stressed borrowers that otherwise may not have the ability to tap into the formal banking ecosystem.

Several sectors have seen private credit deal flow, including real estate, financial services, technology platforms, manufacturing, and infrastructure. Fund mandates cut across a wide range of risk profiles from performing credit to stressed assets and special situations. The ability to fund multiple use cases such as acquisition finance or sponsor backed debt has contributed to the “flexible” nature of such capital.

Private credit, as an asset class, therefore, offers a unique investment opportunity with exposure to varied returns and sectors. Many HNIs looking to diversify their investment portfolios have turned to private credit platforms as an alternate asset class. Sophisticated investors find the higher risk-reward profile of private credit investments appealing and have contributed to much of the growth in this space. The changes in the taxation regime for debt mutual bonds (introduced in 2023) have also to some extent prompted HNIs to look at alternative opportunities for fixed income exposure.

Although most private credit investments are illiquid, they offer predictable and (in most cases) higher returns as compared with other fixed income products. Such investments tend to be highly structured, and in many cases also offer synthetic equity linked returns. Some platforms look at a combined debt and equity solution with the debt investment including a convertible instrument or warrant structure.

Founder borrowers are beginning to find hybrid capital solutions useful on account of a capped equity upside, limited dilution and flexible end use purposes. Given the complexity and greater risk involved, private credit lenders can earn higher returns on such structured instruments.

While the risk profile of a private credit investment is generally higher than that of a borrower accessing more traditional finance, such investments are almost always secured with an extensive security package including asset level security, sponsor pledges, and personal guarantees from founders.

Lending strategies tend to vary with some platforms preferring to be the largest lender while others are comfortable with a syndicated multi-lender structure. The secondary market for private credit investments has not yet evolved, but as the sector grows, the market is likely to see secondary trades taking place.

The insolvency and bankruptcy code, 2016 has been the primary framework for recovery action in the private credit space and lenders have been pushing for faster recovery timelines. Loss of return on capital during the insolvency period has been an issue the market is trying to commercially solve, but clarity on this point will push investments, particularly in the stressed assets and special situations space.

Regulators are concerned of the “knock-on” risk implications that private credit lending will have on the formal banking and regulated lending sector and have been trying to limit and require regulated entities to account for “pass through” exposure. This is another reason why HNI capital could potentially become one of largest sources of funds in the private credit market.

On both capital fronts - supply and demand, private credit is seeing tremendous opportunities for investment and is well positioned to become one of the fastest growing asset classes in India today.

Shilpa Mankar Ahluwalia, Partner, Banking & Private Credit, Shardul Amarchand Mangaldas & Co.