‘Investing in private credit funds is like running a bank like book’

As CEO, what are your key priorities for Northern Arc Investment Managers?

Building a successful investment business depends on three pillars: people, process and product performance. These elements are crucial to strengthening and sustaining our business.

We already have strong processes in place and will continue refining them. We're also focusing on launching new products and maintaining a consistent performance track record, just as we've done over the past six years.

Currently, over the last 10 years, our Category II products are delivering a net return of around 12.5% and sustaining this performance remains a top priority.

You have previously worked in the mutual fund industry. What learnings are you bringing from that space to alternatives?

When I joined the mutual fund industry 25 years ago, its total AUM was about Rs.70,000 crore. Today, it has grown to Rs.70 lakh crore, a 100-time increase. I believe the private credit space holds similar potential. Just a decade ago, it barely existed, but it has now grown to approximately Rs.2 lakh crore.

One key driver of the mutual fund industry's growth was the investor education campaign launched in 2015. A similar effort is needed in the credit space to educate investors about what credit is.

What’s your outlook on the private credit market in India?

The private credit market is very promising, especially with India’s rapidly evolving start-up ecosystem. As both private equity and private debt gain traction, the demand for long-term capital is rising.

Investing in private credit funds is like running a bank business.

The real difference between public and private markets lies in the duration and nature of capital. We're now seeing investors willing to commit for 7 to 10 years. Meanwhile, the emergence of a secondary market in private equity is helping bridge demand and supply.

I believe we will see a similar development for private credit in the coming years—especially as frameworks like the NCLT continue to mature.

To put it simply, it took the mutual fund industry 30 years to reach Rs.10 lakh crore in AUM. The AIF industry reached there in just 10 years.

The Performing Credit space is gaining popularity. Can you explain its appeal and risks?

Just as equity markets have segments like large-cap, mid-cap, and micro-cap, and debt markets have varying bond ratings, the private market has its own sub-categories that include:

• Performing Credit (target returns ~12%)
• High-Yield/Special Situations (16-17%)
• Asset Reconstruction (above 20%, very high risk, very high return)

As investor interest increases, a secondary market for private credit is bound to emerge, enhancing liquidity and product options.

Regarding risk, it’s a misconception that private credit is inherently high-risk. As Howard Marks of Oaktree Capital points out, in his 47-year career, 99% of companies have repaid their debt.

This means that the perceived risk in private credit is far greater than the actual risk.

How do you evaluate companies for private credit investments?

We primarily use a cash-flow-based funding model, meaning we expect repayment from the company's future cash flows rather than relying on asset collateral.

Our selection process emphasizes the fundamentals and governance structure of the company. We conduct physical branch visits to verify claims. This is the part of our high-tech, high-touch model which combines digital analysis with on-ground research.

When evaluating the fundamentals of unlisted companies in the private credit space, where reliable secondary data is often unavailable, how do you ensure the accuracy and reliability of the information you use?

To understand the fundamentals of a company, you need to do lots of secondary research. But for the private credit market, secondary data is not available which is why you need to do primary research including a lot of leg and hand work.

This is the reason we have a 40-member risk management team that does primary research including the physical visits to the branches of the borrowers.

For example, we have lent to more than 350 small NBFCs that have extended more than 10 crore loans. For most of these NBFCs, we are the initial or among the first three lenders which allows us to put certain conditions regarding frequent data sharing.

These NBFCs share their monthly books with us and then we put this data to our inhouse platform-Nimbus, in a classified manner.

So, the availability of high frequency data, our ability to capture it, analyze it and then use it to take the decisions is the key to understand the fundamentals of the companies in private credit space.

Why should MFDs and RIAs consider the Performing Credit market?

For HNIs and UHNIs, capital preservation is just as important as wealth creation. Among the available debt instruments, fixed deposits, liquid funds and private credit are the three options to do that. In my opinion, private credit is the only one that can potentially offer real post-tax returns.

This means that for the MFDs advising wealthy clients, entering the private credit space is not just an opportunity—it’s a necessity.

How can MFDs shortlist private credit funds for their clients?

When MFDs select funds, they should know that transparency and trust are paramount. In order to shortlist the funds, they should evaluate:

• The fund house’s track record, especially across different market cycles
• The quality of the portfolio and NPA levels
• The "skin in the game"—how much the fund house has invested alongside its clients