WHY PRIVATE CREDIT FUNDS NEED CAREFUL WATCH

NON-BANKING Financial Companies (NBFCs) are steadily shifting their focus toward retail loans, although some are now in the process of rebuilding their wholesale loan portfolios

- Srinath Sridharan

Simultaneously, several startups are veering away from raising equity capital at discounted valuations. The world of debt mutual funds has witnessed net outflows, as its once-favourable tax treatment was levelled with other fixed-income products due to the removal of indexation benefits. The influx of fresh capital has dwindled, courtesy of tightening market conditions. Consequently, private credit funds find themselves in a more advantageous position when negotiating for higher interest rates, given their status as a scarce source of capital for businesses. These private credit entities continue to tap into opportunities created by the shifting strategies of NBFCs, mutual funds, and conservative banks.

Typically, private credit funds (PCF) invest in the debt or hybrid securities of unrated and lower-rated companies. They offer debt financing to startups and early-stage businesses. While it’s worth noting that private credit comes at a cost, this funding avenue imposes fewer stringent conditions than traditional lenders, providing an alternative for startups that wish to avoid significant valuation reductions through down rounds. Private credit activity in India is experiencing robust growth momentum, with over Rs 30,000 crores deployed across selected transactions in the first half of 2023. With Non-Performing Assets (NPAs) of scheduled commercial banks currently at historic lows, the distressed asset investment pipeline is displaying signs of deceleration. As a result, fund managers are increasingly pivoting toward structured solutions for special situations, such as acquisition financing, bridge-to-IPO funding, and capex solutions. The National Asset Reconstruction Company Limited (NARCL) faces challenges and struggles to scale as originally envisioned.