New vistas for private credit as rates rise, liquidity shrinks

Private credit investors typically target returns of 14-24%, depending on the strategy, such as performing credit, which is more of a vanilla cash flow based lending model, and special situations, which includes structured lending. These investors fund specialized needs of companies such as merger and acquisition financing, for which banks are not allowed to lend in India, or for instances, which do not fit the banking system’s risk-reward parameters.

“Given the interest rate differential as it stands today and the currency risk, we believe that the credit fund opportunity in India is just about beginning and there is a long way to go. There are many gaps to be filled by alternative capital financiers,” Srini Sriniwasan, managing director, Kotak Investment Advisors Ltd, said.

“With interest rates going up and liquidity somewhat drying up in the market, we are seeing opportunities both in the mid market segment and large cap segment. From our special situations fund point of view, we see opportunities where companies have not been able to raise their planned equity raises so they are looking for structured solutions. Opportunity is present across the spectrum,” said Sriniwasan

Amit Agarwal, head, Edelweiss Special Situations Strategy, said the private credit market will see increased deal activity from hereon. “As India moves towards becoming a $5-trillion economy, the private credit market may emerge as a $100 billion opportunity. This fiscal, we expect deals worth $5-6 billion in private credit across performing and special situations strategies,” he added. Investors said private credit in India is seeing an evolution, and activity has been helped by tailwinds such as the Insolvency and Bankruptcy Code. “We are seeing a change in the Indian market along the lines of what we see in the West, where banks focus on working capital and retail loans and any specialized, structured or cash flow-based financing is done by private credit funds,” said Agarwal.

“Because of IBC, lenders are now confident that the contracts they sign and the covenants they include will be adhered to, since the borrowers have a fear of losing their companies if they break contracts,” Agarwal said.

Besides, private credit investors are seeing many opportunities in the market including M&A financing and providing capital to help investors exit their investments.

While higher-rated large-cap companies may have access to competitive bank financing, Sriniwasan said even in such companies, credit funds are seeing dealmaking opportunities. “A company rated AA or above is highly likely to get very competitive pricing from banks. As a private credit fund in India, one is necessarily looking at companies that are rated below that. Even if it’s a high-rated company, if the nature of the use of funds is not a permitted activity for banks, such as M&A financing, such needs can be addressed via a private credit or special situations fund,” he added.

“There are also situations where private equity funds are looking for an exit and for some reason that exit is not happening and promoters want to raise money to provide an exit to them,” said Sriniwasan. Kotak is looking at opportunities in the technology space where companies are looking to raise funds through debt or convertible bonds amid depressed tech valuations globally.