Private credit, a dynamic financial sector, serves as a critical bridge for businesses and individuals seeking funding outside the conventional banking and public debt avenues. In this realm, non-bank entities extend loans primarily to small and mid-sized companies, distressed businesses, and real-estate investors who often face challenges securing traditional bank loans or tapping into public debt markets. This asset class distinguishes itself by offering attractive high yields and enhanced returns to investors. Furthermore, private credit provides a unique opportunity for portfolio diversification in private markets, as its debt-based nature exhibits lower correlation with the fluctuations of equity markets. Additionally, it presents the advantage of a shorter J-curve, thanks to periodic income generated from loan repayments. 

In the wake of regulatory shifts prompting traditional lenders, such as banks, to withdraw from middle-sized enterprise lending, private credit managers have seized the opportunity to step in and cater to the funding needs of non-investment grade small and medium-sized enterprises. These managers often source target companies from their proprietary networks, affording them the flexibility to establish lending terms that include protective covenants and collateral arrangements to mitigate default risks. Unlike private equity investments, private credit agreements come with fixed terms, providing investors with a predefined exit strategy. 

• Sponsor Financing involves providing capital to private equity sponsors (investment firms) to support leveraged buyouts or other investment activities. These loans are typically used to acquire or invest in companies and are secured by the assets of the acquired business.
• Growth financing provides capital to companies looking to expand, develop new products, or enter new markets. It's a form of private credit that supports businesses in achieving their growth objectives without diluting ownership through equity issuance.
• Refinancing in private credit refers to the process of replacing an existing debt obligation with a new one, often with more favorable terms. Companies may choose to refinance to lower interest rates, extend maturities, or adjust debt structures.
• Performing credit includes loans made to companies or individuals with a strong track record of meeting their financial obligations. These loans typically have lower default risk and may offer lower interest rates compared to non-performing credit.
• Special situations credit is provided to companies facing unique financial challenges, such as distressed situations, turnarounds, or restructurings. Lenders in this category often take a more active role in the borrower's affairs to mitigate risk.
• Structured credit encompasses a wide range of financial products with customized terms and risk profiles. These can include collateralized loan obligations (CLOs), asset-backed securities (ABS), and other structured finance instruments.
• Bridge to IPO - This type of credit helps companies prepare for an initial public offering (IPO) and provides financing to bridge the gap between their current stage and the desired exit strategy.
• Last mile financing refers to providing capital to complete a specific project or deal. It's often used when a business needs additional funding to bring a project to completion or secure a strategic opportunity.
• Venture debt is a form of debt financing tailored for startups and high-growth companies. It provides capital to fuel growth while allowing founders to retain equity. These loans often come with flexible terms and warrant options.

• Private credit, alongside other private assets such as real estate and private equity, plays a crucial role in a well-rounded investment strategy, offering resilience and value-building opportunities that counterbalance the volatility often seen in public markets. While private assets are not entirely immune to market fluctuations, they provide investors with the potential for long-term diversification and wealth accumulation. 
• In contrast to the challenges faced by public markets in 2022, advisors utilizing private real estate and similar assets experienced outperformance, highlighting their value as income-generating and uncorrelated components of a portfolio. 
• Private credit, in particular, emerges as a potent addition to traditional fixed-income strategies, offering a range of benefits. This involves the creation of additional revenue, increased diversification, potential resilience, and return enhancement. 
• When integrated into a conventional portfolio of stocks and bonds, private credit contributes to meaningful diversification and an improved risk-return profile. Its direct lending approach, free from intermediary banks, brings about greater efficiency, confidentiality, execution certainty, and structural flexibility for borrowers. 
• For investors, this translates into robust documentation, protection, and ultimately, more appealing returns. Especially for those seeking alternatives to the traditional 60/40 stock and bond portfolio, private credit stands as an attractive core holding that can bolster long-term wealth-building strategies.

• Borrowers are increasingly turning to private credit arrangements for several compelling reasons. First and foremost, they value the certainty and speed of execution that private credit offers, particularly in the context of volatile public markets. 
• Additionally, the confidentiality provided by these arrangements safeguards proprietary information from broad dissemination. 
• Borrowers are willing to pay a premium for the execution certainty, agility, and customization that private lenders provide, making it an attractive choice for privately held companies focused on growth and transformation seeking capital efficiency through direct loans.

• Investing in private credit entails risks that require careful consideration. Floating-rate debt can stress borrowers if interest rates rise, leading to defaults. 
• Low GDP growth has a modest impact compared to inflation, which magnifies default risk for highly leveraged businesses. 
• Inflation can harm companies unable to pass on rising costs. Recent global inflation trends are a concern. 
• The link between leverage and default underscores the importance of disciplined investment structuring, with covenants and safeguards between borrowers and lenders crucial in managing default risk in private credit investments.

• Private debt has firmly established its presence within the portfolios of many investors, providing a hedge against inflation and interest rate fluctuations, along with an attractive risk-return balance. The projections indicate that private debt will maintain its position as one of the fastest-growing alternative asset classes in the coming five years, with assets under management (AUM) forecasted to reach $2.3 trillion by December 2027, reflecting a compound annual growth rate (CAGR) of 10.8%. (Source: Prequin)
• The total Private markets assets under management (AUM) reached $11.7 tn as of June 30,2022. (Source: Mckinsey & Co.)
• Today, private credit represents more than 20% of the US market for below-investment-grade credit, up from 5% in the mid-2000s , and plays an important role in financing large transactions. (Source: Blackstone)
• The total capital raised by 137 private debt funds closed during the first three quarters of 2022 $172.1 bn (Source: Prequin)

• The alternate debt market in India is estimated to be around $90 billion as of 2022 (BCG, McKinsey reports)
• The alternate debt market is projected to reach $140-150 billion by 2025, representing a growth of over 50% in 3 years (McKinsey, BCG)
• By 2030, the alternate debt market could surpass $250 billion as per Avendus Capital estimates.
• Over last 5 years, India attracted the largest private credit investment volume ~$9.5 bn of all Asian Markets. (Source: GPCA)
• India has seen ~5 Lakh Cr of Capital Commitment in AIF Category 2 out of which ~2.5 Lakh Cr is already deployed in Private Credit Strategies. (Source: SEBI)
• In the last five years, the private credit market has evolved exponentially in volume and numbers. The size of category II AIF market (of which private credit funds are a key component) has reached ₹6.96 trillion, up by around 24% on a year-on-year basis. (Source: Mint)

• On a global scale, the largest investment funds are dominated by Private Credit Funds, with prominent examples including Oaktree, Blackstone, and Blackrock. Following the aftermath of the Global Financial Crisis, the diminishing availability of bank lending opportunities has ushered in a new era for Private Credit as it takes center stage. 
• A report from EY had forecasted a 12% annualised growth in Private credit between 2021 to 2025.
• In India, the private credit market is thriving due to supply-demand imbalances and favorable deal terms, creating a positive investment environment. The annual demand for private credit in India stands at approximately INR 50,000 crores, while the supply hovers between INR 12,000 to 15,000 crores, resulting in a premium for private credit.
• According to SEBI data, H1 2023 witnessed the registration of 15 new Alternative Investment Funds (AIFs) with a credit/special situation focus. As of June 30, 2023, 51 AIFs are in the registration process with SEBI, and 11 of them are poised to become private credit funds. However, concerns arise as increased fundraising activity coincides with a decline in transactions, potentially leading to periods of mis-pricing of risk and elevated credit costs. 
• Foreign capital has played an important role in meeting the need of borrowers for private credit in India and resolving the NPAs over the last five to six years. The trend is expected to continue on the back of India’s growth story, though higher interest rates may play spoil sport in the near term. 
• Looking at the recent trend, strong interest can be seen among family offices, UHNWI and HNWIs to invest in private credit funds and such domestic inflow may become a large source of capital to fuel Indian private credit growth story.

The demand for private credit has been on a notable upswing, reflecting a shifting landscape in the financial sector. While private credit transactions predominantly focused on distressed situations in the recent past, there has been a discernible shift. 

With Non-Performing Assets (NPAs) at scheduled commercial banks at historical lows, the distress asset investing pipeline has shown signs of slowing down. Consequently, fund managers are increasingly turning their attention towards structured solutions for special situations, including acquisition financing, bridge to IPO, and capital expenditure solutions. This change in focus coincides with developments in other segments of the financial industry. 

Debt mutual funds have witnessed outflows due to the removal of tax advantages, and non-banking financial companies (NBFCs) have shifted their focus towards retail loans. In contrast, private credit players have remained agile and continue to seize opportunities left by these changes, as well as from conservative scheduled commercial banks.

(Source: BQ Prime News Article)

The growth of private credit in India is being significantly boosted by the increasing interest from domestic capital sources, including family offices, Ultra High Net Worth Individuals (UHNWIs), and High Net Worth Individuals (HNWIs). This trend is driven by various factors, including the rise of family offices and a growing focus on balanced, risk-adjusted returns. 

India's strong economic growth, robust equity markets, flourishing startup ecosystem, and the incorporation of Employee Stock Ownership Plans (ESOPs) into compensation packages have also accelerated wealth creation. It is expected that India's HNI population may double by 2027, with a 58.4% increase in the UHNWI population during the same period. 

The formalization of the economy and digitalization have made it easier to identify and reach potential investors, with wealth managers and distributors actively educating investors about the potential for higher yields through private credit investments. Additionally, the recent elimination of long-term tax benefits for debt mutual funds has encouraged a shift away from these funds as a source of fixed income. If this trend continues, domestic capital is poised to play a more significant role in driving the growth of private credit in India, contributing to the sector's expansion and development.

(Source: EY Private Credit H1 2023 report)