The rapid growth of private debt in India

Amid a backdrop of high stock market volatility, falling bond prices and persistent inflation, interest in alternative investments is surging. Nowhere is this more apparent than in the private debt markets, which have seen global assets under management increase at an annualised rate of more than 12% since the start of the coronavirus pandemic.

Recently, I moderated a panel discussion on the state of the private debt markets in India at an IQ-EQ Speaker Series event in Mumbai. The eminent panel comprised:

• Piyush Gupta, Head of Credit Markets, Investec
• Tejesh Chitlangi, Senior Partner, IC Universal Legal
• Mayur Gala, Partner, PwC
• Hemal Mehta, CFO, Edelweiss Alternative Asset Advisors

The discussion looked at why India could be the next big destination for private credit. Here are some key insights from the event.

Attractive market dynamics

Featuring such seasoned speakers, the panel discussion provided deep insights into both the strategic and structural aspects of the private debt market in India.

In terms of market dynamics, the major funding gap in India at present is a key catalyst and thus an immense opportunity. Events like the Global Financial Crisis of 2008, the Non-Banking Finance Company (NBFC) crisis of 2018, and the COVID-19 crisis of 2020 have all restricted the ability of domestic financial institutions to support the huge demand for growth capital from corporate India.

At the same time, demand for loans in general, and particularly from growth-oriented middle-market businesses, has been high due to the strength of the Indian economy. This year, the International Monetary Fund (IMF) expects India to generate GDP growth of 6.5%. This mismatch in funding is creating a lot of opportunities for private debt lenders, who are able to finance the growth-oriented companies.

Panellists also pointed out that there is a high demand for flexible capital in India. Today, many borrowers have financing needs that do not fit the traditional banking model. This is where private debt lenders can add value as they have more flexibility when it comes to structuring loans. For example, these lenders won’t punish a borrower if it is late for one or two repayments.

Another growth driver the panellists touched on was the favourable regulatory environment. In recent years, the Indian government has implemented several reforms that have made the country more attractive to private lenders, the primary one being the Insolvency and Banking Code (IBC) legislation. The IBC’s success in expediting insolvency resolution and maximizing value for creditors has significantly enhanced their confidence in the Indian market.

India also recently established GIFT City, short for ‘Gujarat International Finance Tec-City’. A financial hub designed to compete with the likes of Singapore and Dubai, it offers an environment of reduced regulations and taxes to attract businesses and investment. Within GIFT City, any income generated by an investment manager is completely tax-free for 10 consecutive years out of 15 years. This is a major plus for private debt investors. Additionally, there is no Goods and Services Tax (GST) on any services. This translates to higher returns at the fund level.

Finally, panellists discussed technology and its role as an ‘enabler’ of the asset class. Private debt is a complex asset class requiring specialist administration and reporting solutions that can track cash flows, maturities, covenants, and other variables. It’s essential that those raising capital and making investments have access to real-time data. Thanks to the emergence of advanced new technology solutions such as Allvue (which IQ-EQ has a strategic partnership with), which are helping to build investor confidence, we are seeing rapid democratisation of the asset class.

Given this confluence of factors, a growing number of asset managers are setting up private debt funds in India as they look to capitalise on the attractive market dynamics. And assets under management (AUM) are growing quickly. Indeed, at the end of 2022, India-focused AUM in private debt stood at $15.5 billion, around double the figure from a year earlier, according to financial data provider Preqin.

High demand from investors

Turning to investor demand for private debt, panellists explained that demand is being driven by several factors.

Firstly, investors are drawn to the high returns on offer. In the current environment, it’s possible to achieve all-in yields of around 7-9%, or possibly even higher, from private debt investments. This is a significantly higher return than the returns on offer from investment-grade corporate bonds. Investors also like the fact that yields are often floating. In an inflationary environment, this is a major plus.

Secondly, institutional investors in India like the concept of regular coupons. This is quite a novel feature for a lot of investors in the alternative investments space, who are typically accustomed to seeing returns at the end of an investment’s lifecycle. The investment committees of insurance companies and large family offices see the regular payments as a very attractive feature.

Of course, another attraction of private debt is that it can help investors diversify their portfolios. In India, the corporate bond market is under-evolved, with few opportunities beyond the rating of AA. Meanwhile, tax breaks for fixed income funds and market-linked debentures were taken away in March this year. So, the asset class is appealing to those looking for new sources of return. The fact that private debt investments tend to have a low correlation with public market investments, particularly during periods of market volatility, is an added bonus.

Lastly, wealth expansion in India is creating a large and growing pool of investors. From ultra-high-net-worth individuals to family offices, there are many investors seeking strong and stable financial returns. Looking ahead, the panellists said that they expect more institutional capital to come in and help private debt funds scale up in order to meet the high level of demand from Indian investors.

Missed the event? Watch here

• Watch Justin Partington’s keynote speech
• Watch the panel discussion