Private capex boom offers opportunity for private credit funds to deliver double-digit returns

Private credit refers to loans or debt financing provided by private investors such as credit funds, to businesses or individuals.

Over the next 12 months, private credit could become a $10-billion market as more funds enter this space and private sector capex picks up, said Shekhar Daga of ICICI Prudential AMC at PMS AIF WORLD's 5th annual summit.

Private credit refers to loans or debt financing provided by private investors such as credit funds, to businesses or individuals. These loans are typically not traded on public markets and are structured to meet the specific needs of borrowers, and come with a higher interest rate.

“There is more demand than supply in terms of capital in the current market,” Daga views the current scenario as an opportune time for lenders because it allows them to be selective.

"It's a good time for people like us to say no to a lot of deals because one can pick and choose what deals they would like to do.”

Aakash Desai, Head of private credit at 360 one asset, anticipates a significant surge in the private credit market, projecting a market size of $50-60 billion over the next 5 years, marking a 200-300 percent increase from the current $15 billion.

Booming sectors

"Areas prioritized by the government for capital expenditure are particularly ripe for private credit investment,” said Nikhil Garg, from Alternatives Axis AMC.

“This includes sectors aligned with Production Linked Incentive (PLI) schemes, spanning across 13 to 14 industries earmarked for strategic investment." Garg specifically identifies renewables, electric vehicles (EVs), and smart metering as capital-intensive domains where private credit plays an indispensable role. Garg said that private credit helps these sectors by providing companies with funds for short-term needs. This helps them scale up their operations.

Akash Desai favors industrials, pharmaceuticals, and chemicals as sectoral picks. He is wary of real estate or any industry requiring approvals to generate cash flow. Additionally, he steers clear of asset-light industries and those with thin margins, which pose a higher risk. Desai states, “Applying these three principles, we would stay away from real estate within our current portfolio, as well as from project finance, which entails long-term capital needs. We also avoid asset-light service-based industries where the probability of default may be low, but the loss given default could be high.”

Global Opportunities

Garg prefers Asian markets, such as Thailand and Indonesia. These economies have performed well post-pandemic, and are thriving from a fiscal perspective, and maintain strong domestic consumption. “I believe these are areas with demographics similar to India, making them suitable for a high-yield market or a flourishing private credit market," said Garg.

Industry wish list

Aakash Desai's wish list includes allowing insurance and pension capital to enter the industry for stable, long-term returns.

He also advocates for clean equity and debt tax to harmonize taxation for equity investments.

Additionally, the call is for conduct-based regulation, urging regulators to focus on overarching principles rather than intricate, micro-instructions. Desai emphasizes, "Let there be more conduct-based regulation rather than saying I'll allow this and I'll disallow this."

PMS AIF WORLD is an alternates focused investment and wealth platform for high net-worth individuals and non-resident Indians.

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