Why Alternative Investment Funds Are Betting On Performing Credit

Mutual funds have cut credit exposure after the Franklin Templeton crisis; banks and NBFCs have less flexibility

Credit risk is no longer a popular term among mutual fund (MF) investors after the Franklin Templeton crisis that shook the MF industry in March 2020.

From managing 61,837 crore of assets under management (AUM) before FT crisis, the credit risk MFs now manage *24,687 crore of AUM, which translates into a decline of about 60%.

On the other hand, banks and nonbank financial companies (NBFCs) are constrained in terms of the type of credit exposure they can take, due to regulations stipulated by the Reserve Bank of India.

This has given opportunity to alternative investment funds (AIFs) to steadily increase their activity in the private credit space. In 2022, deal value for AIFs in the private credit space stood at $2.3 billion (18,926 crore). According to industry experts, performing credit space is where sizeable amount of new AIF flows is getting deployed.

Consultancy firm EY in a report in November 2021, said the opportunities in the performing credit market was expected to range between $39 billion and $89 billion over the next five years.

PERFORMING CREDIT

Performing credit refers to lending to companies that are running their business on an ongoing basis, have a long track-record and are profitable at Ebitda-level (earnings before interest, taxes, depreciation and amortization).

These funds don't invest in entities where the businesses are no longer viable, or are in distress.