Can private credit mirror public market returns is a serious question investors are asking: Karthik Athreya of Sundaram Alternates

Higher interest rates and a harmonisation of the tax treatment for different forms of debt investing has resulted in a surge in interest in this private credit as an asset class, says Athreya, head product and strategy, private credit at Sundaram Alternates

By Samar Srivastava Forbes India Staff

Published: Jun 9, 2023 05:36:06 PM IST

Updated: Jun 9, 2023 09:12:39 PM IST

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Karthik Athreya is a Head of Product & Strategy at Sundaram Alternates

Q. How has private credit performed in the last year?

We see this as a massively growing asset class. It is already a trillion dollars worldwide and in India if you juxtapose the Alternative Investment Funds Category 2 piece there is Rs500,000 crore of capital commitment of which Rs250,000 has been (already) deployed into strategies in private credit. So clearly this is no longer an emerging asset class. It is growing in diversity as well as different kinds of return and risk rewards not just around the world but also in India.

Q. How have Indian investors reacted to this shift?

Domestic investors have started to see the advantages of allocating a part of their portfolio to private credit—it could be a real estate fund or a corporate credit fund, stressed assets, venture debt and so on. There is a wide range of returns ranging from 13-14 percent to 25 percent based on the liquidity, duration, risks and sector invested in. Over time, since 2010 for banks, there has been an increasing shift to look at more traditional forms of funding. So they would want to do things like working capital finance for larger companies (instead of funding smaller companies.) And so there is a swathe of companies not able to access bank credit—companies between Rs100-2,000 crore. We believe this opportunity to be Rs50,000 crore in annual demand. A host of regulatory restrictions prohibit banks from financing acquisitions, corporate reorganisations, last-mile working capital mismatches, refinancing, bridge to liquidity events like IPOs. These typically do not fall within bank credit appraisal systems.

Q. How large is the opportunity set for Alternative Investment Funds?

There is performing credit, regulatory arbitrage special opportunites (spoken of above, distress situations like when a company goes into insolvency proceedings and venture debt). Most of the money for AIF Category 2 funds has been raised in these four categories. $100 billion has been committed and it is growing at 20-30 percent year on year.

Also read: Why debt is juicier than equity investments today

Q. What is the demographic profile of investors?

This is a market that has now opened up to HNIs or anyone with more than Rs1 crore in investible funds. In India, (these) investors have had three investment opportunities. First is equities. India being one of the few growth economies means that investors can do well here. Then there are the conservative capital protection strategies that have investors buying government securities and fixed deposits. And then there are alternates like private credit, private equity etc—basically anything that doesn’t fall into the first two buckets. The last bit was at sub 5 percent in a typical investors book, say, six years ago. It has now grown to 15-20 percent. So, there is more awareness and acceptance of this. Can private credit mirror public market returns is a serious question investors are asking?

Q. Does your investor pool mirror this?

Broadly, we have four types of investors and I think this is reasonably representative of the market. First is the high-networth individuals—these are mid-market professionals to senior management and those who sold businesses and run small family offices. In effect, these are those who have the ability to put Rs1-5 crore in any fund. The second are corporate treasuries—for IT companies, manufacturing companies where they make investments in bonds, fixed deposits and mutual funds. Third are insurance companies, pension funds, sovereigns who have mandates to invest in AIFs as well. Fourth that are emerging are family offices who have set up trusts and LLPs where they look at an organised investing platforms.