Mumbai: The private credit market in India is witnessing substantial growth, projected to reach $58.3 billion by 2028. The rise is driven by better investment dynamics such as lower default rates, increased domestic appetite for private credit, and favorable returns that align with high-net-worth individuals’ expectations. With innovative structures like Alternative Investment Funds (AIFs) gaining traction, the landscape for funding has transformed significantly, allowing stakeholders to maintain equity while accessing crucial capital.
Private Credit Market on the Rise
The private credit landscape in India is evolving rapidly, spurred by the necessity for promoters to seek alternatives beyond traditional equity financing. A recent report by PWC revealed that the private credit market soared to a staggering $10 billion as of 2024. In a world where companies might have had to relinquish control to equity investors, private credit safeguards promoters’ ownership stakes, enabling smoother business operations and focused growth.
Moreover, the transition of A-rated corporations into the D (default) grade dropped to just 0.86% from 2013 to 2023, a marked improvement from 1.9% in the previous decade. This decrease emphasizes the favorable risk-reward ratio now present in the Indian banking sector and draws investors’ attention towards private credit opportunities.
Domestic Investors’ Growing Interest
Historically, the private credit space was dominated by foreign investment. However, a significant shift has been observed as domestic investors, particularly through Alternative Investment Funds (AIFs), have begun to play a crucial role in this market. Governed by the Securities and Exchange Board of India (Sebi), these AIFs provide diverse capital options tailored to meet various funding needs, offering flexibility in terms, structure, and repayment schedules.
For high-net-worth individuals (HNIs) and ultra-high-net-worth individuals (UHNIs), the appeal of private credit is increasingly compelling. With the risk premium on equities diminishing, yields from performing credit in the private market are now presenting attractive opportunities, with an average risk premium hovering around 5%. A targeted return of 12-16% per annum resembles long-term equity returns while also outperforming conventional fixed income options, making private credit an alluring option for wealth preservation and growth.
High Risk, High Return Strategy
The landscape of private credit, while promising, is not without risks. Investors must navigate complex structures that can lead to significant returns but also expose them to potential defaults. Even in tougher scenarios, a portfolio could yield 15% annually with notable default rates, yet maintaining diversification is essential. This diversification, backed by robust asset management teams, helps mitigate the complex risks inherent in the private credit sector.
The AIF structure allows managers to create pooled, diversified portfolios that significantly reduce exposure to risks associated with individual credits. As of 2023-24, AIFs have reported remarkable growth, with a compounded annual growth rate (CAGR) of approximately 32% since 2018. Particularly, Category II AIFs—which comprise about 80% of total commitments—have become the preferred method for investors looking to balance risks and rewards effectively.
The Future of Private Credit in India
Looking ahead, industry experts, including those from EY, predict that the private credit market in India is poised for explosive growth, potentially reaching $58.3 billion by 2028. This anticipated growth reflects broader trends surrounding economic stability, rising investor confidence, and the increasing sophistication of India’s banking sector.
It’s essential for potential investors to approach the private credit market with a deep understanding of its dynamics. High returns come with high-risk exposure, and even with collateral or personal guarantees from promoters, the risks can never be entirely eliminated. However, for those who can navigate these complexities with a reliable strategy in place, the rewards can significantly enhance their financial portfolios.
As the Indian economy adapts to these evolving financing methods, private credit isn’t just a passing trend; it appears to be a cornerstone of future financial dynamics, providing firms with crucial funding without sacrificing ownership. The landscape is becoming fertile ground for innovative finance, and adapting to it could yield favorable opportunities for savvy investors.
In conclusion, the burgeoning private credit market in India signals a shift in investment behavior among domestic investors, presenting them with opportunities to sustain equity while accessing needed funds. With careful navigation of complexities and potential risks, the future of private credit holds promise for many.
Views are personal.
The author is the chief executive officer of Equirus Credence Family Office.
Bankerpedia’s Insight💡
The rapid growth of India’s private credit market to $10 billion underscores a pivotal shift in financing dynamics, enabling promoters to retain control while meeting funding needs. This surge is facilitated by increased domestic investor participation and the rise of Alternative Investment Funds (AIFs), fostering a more resilient banking landscape. As the market projects to reach $58.3 billion by 2028, savvy investors should approach this opportunity thoughtfully, balancing potential high returns with inherent risks. Diversification and expertise will be crucial in navigating this evolving space.
What Does This Mean for Me?🤔
- Salaried Person → Increased investment options, potential higher returns for savings.
- Business Owner → Greater funding flexibility without losing equity control.
- Student → Increased investment options for future financial planning.
- Self-employed → Easier access to flexible funding without losing equity.
- Homemaker → Increased investment opportunities for homemaker financial planning.
- Retiree / Senior Citizen → Increased investment risks may impact retirement savings negatively.
- Job Seeker → Increased funding options, potentially more job opportunities available.
- Farmer / Rural Citizen → Easier access to credit for farming investments and growth.
Research References📚
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