Local factors insulate private credit market from global storm

The relative calm, industry executives said, is due to the country’s regulatory framework, funding structure and investor base – all of which differ sharply from those in the developed markets.

“The size of the US private credit market is $2 trillion compared with our… about $25 billion,” Eshwar Karra, deputy managing director, Kotak Alternate Asset Manager, told ET on the sidelines of a IVCA event in Mumbai. “So the consequences of any… issue there, even a minor cold, and they will be thinking about pulling out.”

Most global institutions have significant exposure to the US market.

Global investors have been closely watching developments in the US private credit industry – a market estimated at about $2 trillion amid concerns around valuations and liquidity in certain investment vehicles. By comparison, India’s private credit industry remains much smaller at less than $20-25 billion and structurally distinct.

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Even so, the industry believes India’s private credit ecosystem is relatively insulated because of regulatory safeguards and a predominantly domestic investor base.

“Sebi and the regulators have been very prudent in terms of how they have thought about the entire landscape here,” he said. “Most of the private credit in India happens from closed-ended funds, which ensure that there is no significant asset-liability mismatch as we are investing in illiquid assets which are longer duration assets.” Stateside Concerns
In contrast, several concerns emerging in the US are linked to semi-liquid investment vehicles that allow periodic redemptions, which can create liquidity pressure during market stress.

“Few recent headlines from US are related to BDCs or semi-liquid investment vehicles,” Kaushal Ganeriwal, managing partner, Ascertis Credit, said at the IVCA event. “I think the Indian context is very different,” he said.

“The way Indian regulations are structured, private credit investment vehicles are closed-ended taking away the risk of asset liability mismatch emanating from a semi-liquid vehicle,” Ganeriwal said. “Banks in India are highly restricted from investing into AIFs which means that any potential risk from private credit if at all would not result in any broader systemic risk.”

Another factor insulating the market is the type of investors participating in private credit funds.

Unlike in some global markets where retail investors have gained access, Indian funds typically raise capital from institutional or sophisticated investors.

“The private credit space in India is largely invested into by institutional or sophisticated capital,” Ganeriwal said adding that this creates an safer environment from regulatory perspective. Industry expects the asset class to grow as India’s economy expands and companies seek alternatives to traditional bank financing.

Private credit is expected to see a 20% CAGR for the next 20 years to reach $1 trillion, said Kriti Mohan Ghosh, MD, Special Situations Fund — EAAA Alternatives. “Looking at 20 years down the line, we are looking at an economy of maybe $15 trillion,” hesaid.