Private Credit: The Quiet Star in India's Alternatives Universe
As India's alternative investment market expands rapidly, a clear winner is emerging from the shadows. While private equity and venture capital dominate headlines, private credit offered through Alternative Investment Funds (AIFs) is quietly establishing itself as the strategic choice for discerning investors seeking stability amid volatility.
Explosive Growth Driven by Structural Gaps
Recent industry reports reveal that private credit Assets Under Management (AUM) reached approximately $25–30 billion for FY2025. Even more impressive is the projection that this figure will more than double to US$60–70 billion by 2028. This remarkable growth isn't accidental but stems from a fundamental structural gap in India's financial ecosystem.
Traditional banks and Non-Banking Financial Companies (NBFCs) maintain conservative lending approaches toward mid-market companies and customized financing needs. Meanwhile, Indian corporations continue to require flexible capital for acquisitions, working capital requirements, and project funding. Private credit funds have adeptly stepped into this void with tailored, asset-backed structures that command premium returns while filling critical market needs.
What Makes Private Credit Compelling for Investors
The appeal of private credit lies in its predictable nature. Most performing credit funds target returns between 14–16% with clear cash-flow visibility and strong collateral protection. Unlike private equity or venture capital investments where outcomes depend heavily on market cycles and exit timing, private credit returns are contractual obligations.
These investments typically feature first charge on assets, escrow controls, step-up coupons, and promoter guarantees. However, investors must remain aware of the illiquid nature of this asset class, with multi-year lock-in periods and limited exit options being standard features of most AIF structures.
Not All Private Credit Strategies Are Equal
The private credit landscape features multiple strategies across the risk-reward spectrum. Performing credit remains the most stable option, offering mid-teens returns through senior-secured structures. Structured credit and real-estate credit deliver higher yields but depend more heavily on promoter strength and project execution capabilities.
Special situations credit delivers the highest Internal Rates of Return (IRRs) but demands sophisticated underwriting and legal expertise. With new AIFs launching every quarter and significant quality dispersion across the market, investors need a disciplined approach to allocation and fund manager selection.
Navigating the Private Credit Opportunity
Successful investment in private credit requires careful calibration based on liquidity needs, risk appetite, and choice of credit verticals. Experts recommend diversifying across multiple vintages, fund houses, and strategies to enhance yields without excessive risk concentration.
Manager selection proves critical, with the best funds demonstrating strong underwriting capabilities, deep sector knowledge, proprietary deal sourcing, tight covenants, and meaningful General Partner commitment. Investors should thoroughly review track records, past recovery experiences, portfolio concentration levels, deployment pace, and reporting transparency before committing capital.
India's private credit market benefits from powerful structural shifts including increased entrepreneurial activity, more sophisticated capital markets, and borrowers actively seeking alternatives to traditional lenders. For selective investors, private credit offers a compelling blend of yield, controlled risk, and growing strategic relevance in India's evolving financial landscape.
