Macroeconomic tailwinds to boost private debt investment and growth in AIFs

The perennial need for personal loans has already been felt not only in India but all over the world. Globally, private debt accounts for 10-15% of assets under management under Private Capital, which includes private equity, venture capital, real estate, etc. After the pandemic, an increase in liquidity in the global market has shifted a lot of investment. Private lending to emerging markets, including India, where it gained major traction due to favorable economic and administrative reforms.

Personal Loan Opportunities in India

Private loan opportunities in India arise from structural issues in the debt market. Following the global financial crisis, the banking sector became increasingly risk averse to the mid-corporate space. Asset managers sharply cut their allocation to the mid-corporate segment since 2018-19 following defaults by IL&FS, and a moratorium on withdrawals in credit schemes managed by Franklin Templeton. On the other hand, after facing a liquidity crunch in 2018, non-bank lenders offering corporate loans largely migrated to retail/MSME loans. ) have faced a clear lack of access to credit.

Opportunities are also arising from asymmetries in the credit market and mispricing of risks, leading to much lower growth in lending to companies with credit ratings of A and below, compared to the AA and AAA rated universe.

The above factors have resulted in a huge gap in the private loan market and consequently provide significant opportunities for private loan growth. With liquidity crunch and credit mispricing, corporates rated below AA offer rich risk-adjusted returns to discerning lenders.

turn to aif

When it comes to the type of structure needed to grow private loans, alternative investment funds (AIFs) fit the bill. The growth in industry commitments, which indicates that clients are willing to invest in AIFs, strongly reflects the phenomenon of AIFs driving growth for private lending in recent years. Thanks to their flexible structure (with regard to investment in unlisted entities etc.) and regulations that support the investment vehicle.

AIFs have over the years been able to take care of the supply side for private loans in the domestic market by raising funds from HNIs, family offices, corporate treasuries and institutions. Despite the recent jump in interest rates, the segment still looks attractive.

Credit performance as a segment within Personal Credit

Within the private credit space, India has seen the most focus on Real Estate Funds, Special Situation Funds, Venture Debt Funds and Distressed Funds. While these funds cater to specific market needs, these funds typically look for an IRR of more than 16%.

This leaves a huge gap in the market, as shown in the graph below.

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Mutual Funds generally lend at better rates, and Venture/Distressed/RE/Special Situation Funds are above 16%, the range between 8% – 16% is wide open. This space includes cash flow-based lending to operating companies with a focus on growth, long-term working capital, capital expenditure, etc.

What’s in it for investors?

The above chart shows that as we move from AAA to AA rated bonds to below BBB rated companies, an attractive opportunity for investors exists in a white space known as performing credit, which mutual funds and lies between distressed debt funds and others. two extremes. The investment opportunities in this sector are expected to go up to $100 billion in the next 3 to 5 years.

The environment is favorable from the demand side for growth in the private credit space, including performance credit. Mid-corporates that are unrated, or rated in the category of BBB and A, are growing at a pace higher than that seen by large corporates. Our analysis indicates that there exist 15,000+ such companies which are profitable at OPBITDA level (Operating Profit before Interest, Tax, Depreciation and Amortization).

Fresh capital is drying up due to tight markets. Therefore, private credit funds have more leverage to negotiate higher rates as a provider of scarce capital to enterprises. India’s excellent ratings and data coverage provides a non-linear opportunity compared to any emerging market. Given these, it is possible to build a truly diversified and stable performing credit portfolio.

risk in space

In the private debt sector, investors are exposed to risks arising out of governance standards, poor disclosures, management capability, operational performance, financial position etc. However, with some recent regulatory steps and professional fund management, such risks can be mitigated while ensuring stability. and forecasting returns.

The Insolvency and Bankruptcy Code, enacted in 2016, gave lenders confidence that those contracts would be honored if the borrowing entity became insolvent or sick. Second, the introduction of the Account Aggregator Framework in 2021 created account aggregators to act as intermediaries between financial service providers and facilitate the sharing of financial information. The framework enabled scope for transparency and efficient decision making regarding borrowing institutions. Information asymmetry has been reduced in recent times by such measures as – providing access to related party information, GST data, bank details, financial disclosures etc. for detailed governance checks.

It is extremely useful to choose a highly professional fund manager while investing in this sector. Investors should look at fund managers who spare no effort for hard work, comprehensive trade monitoring to reduce information asymmetry, excellent sourcing capability, agile quarterly monitoring and accurate pricing of risks, among many factors Let’s leave

Gift City – A new window of opportunity

The International Financial Services Centers Authority (IFSCA), GIFT City, Gujarat was set up to regulate financial services transactions that are currently carried out outside Indian soil by foreign financial institutions and foreign subsidiaries of Indian financial institutions. New regulations to be issued by the IFSCA in April 2022 could facilitate the next level of development of private credit funds, providing a comparable framework to Singapore and other global asset management centres.

Special dispensation has been given to AIFs established within IFSC to provide them higher operational flexibility. The regulatory and tax framework established within GIFT City has the potential to unlock access to a large global pool of capital. To meet the US$100 billion requirement, the infrastructure provided by GIFT City is much needed to cater to and meet the market need for private credit managers.

Author: Vineet Sukumar, Founder & MD, Vivriti Asset Management