India’s alternatives market is expanding rapidly, but not all “alternative” assets share the same characteristics or risk profile. Traditional categories such as private equity (PE), venture capital (VC), and real estate continue to attract capital, but one segment is quietly emerging as a major force: private credit, largely accessed through Alternative Investment Funds (AIFs).
As more high-net-worth individuals (HNIs) and family offices diversify beyond public markets, private credit stands out for offering something that other alternative asset classes often lack — steady income, predictable cash flows, and secured, risk-adjusted returns.
Industry estimates suggest that India’s private credit assets under management have already reached $25–30 billion in 2025, with projections of $60–70 billion by 2028. This sharp growth isn’t accidental. Instead, it reflects a structural gap in India’s lending ecosystem:
Banks and NBFCs remain conservative in lending, especially to mid-market companies or borrowers with non-standard funding patterns.
Corporates increasingly require flexible capital — for acquisitions, working capital, project finance, and bridge funding.
Traditional lenders often cannot customise repayment schedules, security structures, or covenant frameworks.
Private credit funds step in to meet this demand using tailored, asset-backed structures, typically at premium yields.
The premium earned by private credit AIFs is tied to several factors:
Borrower credit-worthiness and leverage profile
Quality and enforceability of collateral
Recovery prospects in the event of default
Complexity of structuring and monitoring bespoke deals
Most performing credit funds aim for 14–16 percent annual returns, supported by:
First charge on borrower assets
Escrow controls to lock in cash flows
Step-up coupons that penalise delays
Personal or corporate guarantees
Tight covenants and defined security cover
Unlike PE or VC, where returns are tied to long-term exits and market cycles, private credit returns are contractual and cash-flow driven.
However, investors must note the illiquid nature of AIFs — lock-ins are typically multi-year with limited early exit options.
Not all private credit strategies carry the same risk or return:
Senior-secured structures
Mid-teens returns
Lower sensitivity to market cycles
Hybrid structures (mezzanine debt, convertible instruments)
Higher yields
Depends more on promoter strength and predictable project cash flows
Backed by project cash flows or land assets
Higher yields
Execution risk is significant
Highest IRRs
Requires deep legal expertise and complex restructuring ability
High recovery uncertainty
These categories form a risk-reward ladder, and investors must understand where each fund sits before allocating capital.
With new AIFs entering the market each quarter and quality varying widely, investors need a disciplined framework:
Align exposure with liquidity needs and risk appetite.
Diversify across vintages, fund houses, and credit strategies to avoid concentration risk.
Evaluate:
Underwriting rigour and sector expertise
Proprietary deal sourcing
Strength of covenants and monitoring systems
Track record of recoveries and default handling
Portfolio diversification
Deployment discipline
Clarity and transparency in reporting
Private credit is not a “set-and-forget” product. Investors should review quarterly reports, cash-flow performance, covenant compliance, and any early warning indicators.
India’s economic landscape is undergoing significant shifts — rising entrepreneurship, maturing capital markets, and borrowers seeking alternatives to traditional lenders.
Private credit is uniquely positioned to benefit from these changes.
For HNIs, family offices, and institutions, this asset class offers:
Attractive and stable yields
Collateral-backed structures
Contractual, predictable cash flows
Exposure to India’s growing mid-market economy
As India’s alternatives market continues to mature, one thing is clear: not all alternatives are created equal. And within this evolving financial ecosystem, private credit is rapidly becoming the strategic, high-impact allocation for sophisticated investors looking for steady, risk-adjusted returns.
(By arrangement with livemint.com)
Disclaimer: We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.