Financial markets, with their constant noise and motion, move in cycles. Periods of optimism slowly build, reach a peak, and then, frequently without any clear signal, transition into phases of doubt and unease. In the current climate of global market instability, a critical question is being asked by seasoned investors, especially those familiar with the equity cycle: where can one find relatively stable, risk-adjusted returns that are insulated from the wild swings of global sentiment?
The Rise of Private Credit as a Solution
For experienced investors who have navigated various asset classes through both crisis and calm, a compelling answer has emerged: the private credit space. More specifically, the focus is on well-structured Alternative Investment Funds (AIFs) that are directly linked to India's real, growing economy.
Over the past twenty years, private credit AIFs have transformed from a niche idea into a fully recognized and substantial investment channel. The global economic crisis of 2008 served as a pivotal turning point. In its aftermath, banking regulators worldwide enforced stricter lending norms to prevent future collapses. This regulatory shift created a lending vacuum, particularly for small and mid-sized businesses, which private credit funds adeptly filled. Globally, assets under management in this sector skyrocketed from under $400 billion before the 2008 crisis to over $2 trillion by 2023.
India's Private Credit Momentum
In India, this market truly found its footing in the latter half of the last decade. Until the early 2010s, banks were the dominant force driving credit growth. However, the scenario shifted dramatically by the mid-2010s when the banking sector was burdened by a surge in non-performing assets (NPAs). Despite the Reserve Bank of India's interventions, bank lending to corporate entities never fully bounced back, opening a significant door for private credit funds to expand their operations.
Initially, Non-Banking Financial Companies (NBFCs) were the go-to for promoters seeking flexible loans. This preference changed after the default crisis of 2018, which further widened the gap between the demand and supply of credit for Indian enterprises. This event became another major catalyst for the growth of private credit. Consequently, the assets under management for India's private credit market witnessed a remarkable jump, growing from approximately $8.4 billion in 2018 to $20.6 billion in 2023.
Navigating Uncertainty with Predictable Outcomes
The past few years have seen extreme financial market volatility, driven by the Covid-19 pandemic, geopolitical conflicts, and unpredictable macroeconomic policies. During such periods of stress, companies in a private credit portfolio might see temporary earnings moderation or asset-liability mismatches.
However, what sets private credit funds apart is their capacity to generate predictable outcomes even in uncertain environments. Fund managers typically maintain close, ongoing relationships with borrowing companies. This connection allows for smoother coordination and negotiation of loan repayments if difficulties arise. The risk profile is further mitigated because most private credit funds provide senior secured debt, often with robust underwriting. This type of debt holds the first claim on assets in case of a default, offering a higher probability of repayment and making these funds potentially more resilient during economic downturns.
Moreover, private credit vehicles can offer crucial support to borrowers when traditional sources dry up. In challenging economic conditions, banks and conventional NBFCs tend to become highly selective, often sidelining small and mid-sized corporates. This selectivity creates ideal opportunities for private credit managers to step in. Borrowers are drawn to them because they can offer tailored lending solutions that are specifically designed to meet their unique business needs and circumstances.
The Evolving Investment Landscape in India
As India's economy continues to develop and diversify, investment strategies are naturally evolving alongside it. The engines of growth are expanding beyond major urban hubs into smaller towns and regions. The flow of capital is shifting from conventional banking channels to more structured credit instruments, and from public markets to the vast potential of private enterprises.
In this dynamic environment, private credit AIFs present a strategic avenue for investors. They offer a tangible way to participate in India's next chapter of economic expansion while actively aiming to manage and reduce exposure to the inherent volatility of public markets. For those seeking stability grounded in real economic activity, this asset class is becoming an increasingly essential part of a balanced portfolio.
