Private credit hits new high in 2022 on volatile markets

Industry experts said in addition to the market volatility, Indian companies have also expanded their manufacturing capabilities, requiring them to tap credit funds. Another key factor is the valuation mismatch in the startup ecosystem, between what investors are willing to give and what the founders or startups are willing to accept, leading to demand for private credit.

“By December, we estimate cumulative value of private credit deals to go north of $4 billion in 2022,” said Vivek Soni, private equity leader at EY India, indicating that this year would be a record for private credit deals.

In recent months, global investment firms such as Värde Partners, KKR along with Mubadala and others launched private credit funds. Domestic firms such as Edelweiss, Kotak Alternatives and IIFL AMC, have also launched or are in the midst of floating their credit funds.

Private credit comprises capital provided by private funds, venture debt, development finance institutions, special situation funds, but excludes credit from banks and non-banking financial companies (NBFCs). Typically, companies tap private credit when banks or NBFCs are unable to underwrite specific transactions. Usually, this relates to either acquisitions or promoter financing or buybacks and it contains specific riders and repayment constraints.

In one of the largest credit deals this year, Apollo Global Management funded Mumbai International Airport Ltd with $750 million. This was followed by a $350 million financing for Cholamandalam Investment and Finance Co. Ltd. from World Bank arm International Finance Corporation.

“We see a strong growth in the private credit market in India as credit funds and long-dated capital fill the gaps existing in the bond market and seek to replace NBFCs and mutual funds which have slowly exited the corporate debt market,” said Utsav Baijal, partner and head of India Private Equity at Apollo.

In recent years, the share of startups within the broader credit market has also expanded. Out of the $3.85 billion so far, the market share of venture debt market for startups would be $1-1.1 billion, said Ishpreet Gandhi, founder and managing partner at Strides Ventures.

The ‘funding winter’ in the startup ecosystem has prompted many startups, especially in the late stages, to put off equity dilution for as long as possible.

Stride Ventures, which has a 30-35% share of the venture debt market (catering chiefly to startups), saw demand of close to ₹1,000 crore per month. However, it closed this year with twice the amount of deals each month. Gandhi also cited increased awareness among founders as they try to find ways to fund their working capital.

“Also, startups are now less distracted because of equity funding. They are aware and their understanding of the various credit structures has increased,” he said.