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As per a recent EY report, in April-September 2024, India witnessed an investment of USD 3.3 billion in private credit deals. Further, in CY 2024, private credit deals reached USD 9.2 billion over 163 transactions, a 7% increase over the previous year.
Although, on the global level, private credit is dominated by institutional players, India is witnessing growing participation from individual investors through Category II AIFs focused on private credit.
What are private credit funds?
Broadly speaking, private credit means the loan extended to a private company, which may not otherwise be able to access the traditional loan market due to their exposure or some short- or medium-term financial issues.
The private credit funds provide non-bank loans to private companies, which majorly are mid-market firms. These loans are often structured, negotiated privately, and are not traded on public markets.
Generally, private credit funds provide higher than conventional debt products, compensating for the relative illiquidity and higher credit risks.
How do they matter to MFDs?
Private credit funds offer differentiated investment vehicles for wealthy investors who do not want to indulge with traditional debt products. These funds allow MFDs to provide high-yield options, believes Kolkata MFD Vikash Baid, Managing Partner, Trust Capital LLP.
Vikash feels that many MFDs now manage above Rs.200 crore. These MFDs handle at least 10-15 HNIs. And debt funds offered by mutual funds do not offer attractive yields due to their structure. “If these MFDs will not sell private credit funds, someone else will. Many HNIs like private credit funds as they offer stability to portfolio and visibility of cash flows,” he adds.
Munish Randev, Founder and CEO of CERVIN Family Office, said, “Private credit makes a lot of sense when the interest rates are already down because in that case traditional debt instruments offer only about 6-7% returns, which may not satisfy seasoned investors.”
These funds provide sophisticated investment strategies, which means that MFDs, by introducing them to their clients, can build deeper trust and long-term loyalty, he added.
Apart from that, closed-ended nature of many private credit AIFs may result in a more predictable business cash flow for the MFDs, said Munish.
Here are the key benefits for MFDs:
- Traditional debt instruments available with the MFDs have struggled to deliver attractive post-tax real returns while the private credit funds offer yields in the range of 10–15%, depending on the risk-return profile and structure
- For HNIs, family offices, and risk-aware clients, such products become an alternative that delivers meaningful income without entering equity-like volatility
- Incorporating private credit funds allow MFDs to diversify their clients’ portfolios beyond traditional equity and debt
- With these products, MFDs can introduce their clients to non-mainstream, institutional-grade opportunities making their offerings different than others
- These products can help the MFDs in expanding their business to the HNI and wealthy clients for whom differentiation and exclusivity is a major factor for strong and permanent relationships
- Higher ticket size and longer lock-in period means larger AUM and more predictable cash flow for business
In conclusion, private credit funds can help the MFDs become more relevant to a newer, more evolved investor class. Its longer lock in periods will result in longer association with the clients which can result in more strong and long-lasting relationships.
