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GAINERS & LOSERS

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 2. 498.857.98%

 1. Mahindra Lifespace Develop...
 2. 3777.68%

 1. Aavas Financiers
 2. 1,9957.24%

 1. Titan Company
 2. 2,463.26.87%

 1. Bank Of Baroda
 2. 163.656.2%

 1. Crompton Greaves Consumer ...
 2. ₹304.5-8.37%

 1. Swan Energy
 2. ₹271-8.23%

 1. Hindustan Copper
 2. ₹107.55-7.76%

 1. Welspun Corp
 2. ₹194-7.04%

 1. Metropolis Healthcare
 2. ₹1,224.75-6.84%


52 WEEK LOW & HIGH

Fri Feb 03 2023 15:49:40
52 Week High 52 Week Low
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 1. Adani Transmission
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 1. Crompton Greaves Consumer ...
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 1. Metropolis Healthcare
 2. ₹1224.75 -6.84%


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Fri Feb 03 2023 15:29:00
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Home / Money / Personal Finance /  Macroeconomic tailwinds to propel growth in
private credit investment and AIFs
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MACROECONOMIC TAILWINDS TO PROPEL GROWTH IN PRIVATE CREDIT INVESTMENT AND AIFS


6 min read . Updated: 04 Feb 2023, 09:21 PM IST Vineet Sukumar Premium The
perennial need for private credit has already been realized, not only in India
but across the world. Globally, private credit accounts for 10-15% of assets
under management under private capital, which includes private equity, venture
capital, real estate, etc.

 * The supply of credit remains an undeniable catalyst for the growth of the
   Indian economy. In its journey to becoming a US$5 trillion economy, India
   requires a credit supply that amounts to ~50% of that targeted economy size.



Read Full Story


The supply of credit remains an undeniable catalyst for the growth of the Indian
economy. In its journey to becoming a US$5 trillion economy, India requires a
credit supply that amounts to ~50% of that targeted economy size. Meeting that
supply size could be a daunting task unless private credit markets mature in
India. This is because banks and NBFCs have been increasingly shifting their
lending mix towards retail over the last few years due to the advent of
technology-led lending models as well as risk aversion towards corporate
lending.



The perennial need for private credit has already been realized, not only in
India but across the world. Globally, private credit accounts for 10-15% of
assets under management under private capital, which includes private equity,
venture capital, real estate, etc. Post the pandemic, the surge in liquidity in
the global market has shifted a lot of investment in private credit towards
emerging markets, including India, where it gained major traction due to
favourable economic and administrative reforms.

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PRIVATE CREDIT OPPORTUNITIES IN INDIA

The opportunities for private credit in India emanate from structural issues in
the debt market. Following the global financial crisis, the banking sector
became increasingly risk averse towards the mid-corporate space. Asset managers
sharply cut down their allocations to the mid-corporate segment since 2018-19,
following defaults by IL&FS, and the freeze of withdrawals in the credit schemes
managed by Franklin Templeton. On the other hand, non-bank lenders in corporate
lending largely migrated to retail / MSME credit, after facing a liquidity
crunch in 2018. As a result, the mid-market enterprises (comprising privately
owned companies majorly located in tier 2/3 cities) have faced a pronounced lack
of access to debt.





The opportunities are also arising out of asymmetry in the credit market and
mispricing of risks causing much lower growth in lending to companies with a
credit rating of A and below compared to the same in the AA and AAA rated
universe.



The above factors have resulted in a massive gap in the private credit market
and consequently significant opportunities for private credit to grow. With a
shortage of liquidity and mispricing of credit, the universe of corporates rated
below AA offers rich risk-adjusted returns to discerning lenders.




SHIFT TOWARDS AIFS

When it comes to the type of structure that is needed for the growth in private
credit, Alternative Investment Funds (AIFs) fit the bill. The surge in the
industry’s commitments raised, which denotes the amount clients are willing to
invest in AIFs, in recent years strongly depicts the phenomenon of AIFs playing
that vehicle of growth for private credit. Thanks to their flexible structure
(with respect to investment in unlisted entities, etc) and regulations
supporting the investment vehicle.

View Full Image
Image courtesy: Vineet Sukumar (SEBI)
Share Via



AIFs have been able to take care of the supply side for private credit by
raising funds from HNIs, family offices, corporate treasuries, and institutions
in the domestic market over the last few years. Despite the recent surge in
interest rates, the segment still looks attractive.

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PERFORMING CREDIT AS A SEGMENT WITHIN PRIVATE CREDIT

Within the private credit space, India has witnessed the highest attention
towards real estate funds, special situation funds, venture debt funds, and
distressed funds. While these funds meet the specific needs of the market, these
funds typically seek IRRs of more than 16%.



This leaves a large gap in the market, as evidenced in the graph below.

View Full Image
Image courtesy: Vineet Sukumar (Internal Research)
Share Via



With MFs typically lending at finer rates, and venture/distressed/RE/special
situation funds above 16%, the space between 8% - 16% is quite wide open. This
space consists of cash flow-based lending to operating companies, focusing on
growth, long-term working capital, capital expenditure, etc.




WHAT’S IN IT FOR INVESTORS?

The above chart depicts that as we move away from AAA to AA rated bonds down to
BBB rated companies, a lucrative opportunity for investors exists in a white
space, known as the Performing Credit, which lies between mutual funds and
distressed debt funds & others at the two extremes. Investment opportunities in
this space are expected to go up to $100 billion in the next 3 to 5 years.



The environment for growth in the private credit space including the performing
credit is favourable from the demand side. Mid-corporates that are unrated, or
rated in the range of BBB and A, are growing well at a pace higher than
witnessed by large corporates. Our analysis indicates that 15,000+ such
companies exist that are profitable at an OPBITDA level (Operating Profit before
Interest, Tax, Depreciation, and Amortisation).



Fresh capital has been drying up due to the tightening of markets. Hence,
private credit funds get more advantage to negotiate for higher rates as a
provider of scarce capital to enterprises. India’s excellent rating and data
coverage offer non-linear opportunities compared to any emerging market. Given
these, it is possible to build a truly diversified and stable performing credit
portfolio.




RISKS IN THE SPACE

In the private credit space, investors face risks, arising from governance
standards, poor disclosures, management capability, operational performance,
financial situation, etc. However, with some of the recent regulatory steps and
professional fund management, such risks can be mitigated ensuring stability and
predictability of returns.



The Insolvency and Bankruptcy Code, enacted in 2016, imparted confidence to
lenders about the covenants getting adhered to if the borrowing entity turns
insolvent or sick. Secondly, the introduction of the Account Aggregator
framework in 2021 created Account Aggregators to act as intermediaries between
financial services providers and facilitate sharing of financial information.
The framework enabled transparency and the scope for efficient decision-making
about borrowing entities. Information asymmetry has been reduced in the recent
past with such measures – providing lenders with access to related party
information, GST data, bank statements, financial disclosures, etc., for
detailed governance checks.



Choosing a highly professional fund manager is extremely useful while investing
in the space. Investors should look at fund managers that leave no stone
unturned for strict due diligence, comprehensive business monitoring to reduce
information asymmetry, excellent sourcing ability, tight quarterly monitoring,
and accurate pricing of risks, among several factors.




GIFT CITY – A NEW WINDOW OF OPPORTUNITY

International Financial Services CentreAuthority (IFSCA),the regulator at GIFT
City, Gujarat was set up to undertake financial services transactions that are
currently carried outside Indian soil by overseas financial institutions and
foreign subsidiaries of Indian financial institutions. Newregulations issued by
IFSCA in April 2022 could aid the next level of growth for private credit funds
by providing aframework comparable to Singapore and other global asset
management centres for setting up funds.



AIFs set up within IFSC have been granted special dispensations to provide them
with higher operational flexibility. The regulatory and tax framework set up
within the GIFT City has the potential of unlocking access to large global pools
of capital. For meeting a US$ 100 billion need, the infrastructure provided by
the GIFT City is much needed for private credit managers to scale and meet the
need of the market.



Author: Vineet Sukumar, Founder & MD, Vivriti Asset Management

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