Family offices, Ultra-High-Net-Worth Individuals (UHNWIs), and High-Net-Worth Individuals (HNWIs) are likely to boost the Indian private credit market through cheaper funds versus US dollar-denominated foreign capital, according to a survey.
“In the first half of 2023, private credit players offered innovative structured solution capital to corporate borrowers. A robust Indian economy continues to attract interest, with several large funds evaluating opportunities and suitable niches to fit their strategy and capability,” EY said in a report.
Over the next 12 to 24 months, most fund managers anticipate increased deal flow in real estate and manufacturing, while expecting slower activity in metals and road sectors. “Demand for private credit will hinge on stress-related, special situations, and capex financing for the present period and the next one to two years. Interestingly, a significantly higher number of fund managers expect stress to drive deals compared to the last survey of December 2022,” the consultant said.
Based on new fund raise activity (including AIF registrations) on one hand and decline in transactions on the other, it is possible that we may be entering a brief period, where more money may be chasing fewer transactions. Such periods often lead to mis-pricing of risk and higher credit cost.
The survey
About 82% of fund managers ranked real estate and manufacturing as sectors with the highest expected deal flow. Financial services
emerged as the second most preferred sector by 45% of fund managers.
Private credit fund managers are split in terms of fund availability over the next 12 months to invest in India. Where 35% believe
it will be difficult to raise funds, 39% voted for the availability of adequate funds in India.
About 39% fund managers believed that, in the current deal flow, stress-related funding and capex financing drive demand for private credit.
Around 70% fund managers believe that competition in private credit deal has increased over the last 12 months.
About 78% of the survey respondents had a target yield ranging from 18% to 24% (high yield) and 22% were 12% to 18% (performing credit). Conversely, fund managers hold a bearish outlook on activity in the metals and road sectors. “Interestingly, compared to our last survey in December 2022, a significantly higher number of fund managers anticipate stress as a driver for deals.”
Fund managers remain divided in their opinions regarding the availability of funds in the private credit market, with some finding fund raising difficult while others believe that there are ample funds available. This divide in opinion persists from the previous survey in December 2022. Also, private credit investors are slightly more bullish in the longer time horizon of two to five years as compared to near term (next one to two years).
