Mumbai: Private credit funds are increasingly exiting their investments well before the date of maturity as they look to reduce the risk of likely stress in payments by borrowers amid soaring international interest rates that are running at more than a decade high.
Companies that manage to raise funds through public listing, share sale to private equity or through the sale of assets prefer to pay up the credit availed from such funds, which are usually at near usurious interest rates, rather than waiting for the debt to mature.
For instance, Kotak Special Situation Fund exited TVS Supply Chain in the recent IPO. Similarly, Modulus Alternatives exited its investment in NDR Warehousing, the warehousing platform not owned by private equity, within just two years of the originally planned three-year maturity.
Private credit serves as a bridge to such exit events, providing capital even though it comes at a higher cost.
In 2021, Kotak Special Situations Fund invested ₹200 crore in TVS Supply Chain Solutions and ₹800 crore in TS Rajam Rubbers through non-convertible debentures to help TVS SCS promoter R Dinesh acquire Canadian pension fund CDPQ’s stake in the company.
“The fundamental underwriting thesis for a credit fund typically revolves around an exit event, which can take the form of an IPO, strategic sale, or refinancing,” said Eshwar Karra, chief executive officer of the Strategic Situations Fund at Kotak Alternate Asset Managers. “It’s rare for any company to operate with high-cost financing for an extended period, for say five years. To ensure some stability, private credit funds often require borrowers to commit to an 18-24 month lock-in period. Once this lock-in period concludes, companies usually proceed with refinancing their debt.”
Alternative credit funds help bridge the gap left by banks’ reluctance to fund capex by providing alternative sources of capital, and therefore having a well-defined exit strategy is crucial when lending.
Similarly, Modulus Alternatives exited nine out of ten investments before the scheduled maturities. While the 10 investments initially had an average investment period of 3-4 years, the realised duration turned out to be 2-3 years. The reasons for these early exits vary from significant improvements in cash flows following investment availability to asset monetisation, equity raised through private equity, and refinancing from the commercial banking system.
“The core for any of our investments lies in decoding sectors and macro themes right and corporates in that sector that have the potential to grow,” said Rakshat Kapoor, chief investment officer at Modulus Alternatives. “A robust risk management process with active monitoring of the portfolios, and an eye on early maturities are important for the overall performance, and thereby exits.”
In November, Sanghi Industries, a listed cement maker raised ₹500 crore at 16-17% interest from Kotak Special Situation Fund for an 18-month period, serving as a bridge finance solution for the promoter to address a critical situation. On August 3, Ambuja Cements entered into an agreement to acquire the company which will give an early exit to Kotak Special Situations Fund.
“Not all corporates that access private credit are distressed,” added Kapoor. “In fact, we have made investments in companies that required growth capital and were unable to access the formal banking system for various regulatory requirements.”
Private credit funds have become an attractive option for corporate treasuries, family offices, and other high-net-worth investors.
Their appeal lies in the promise of superior yields. Taxation changes have them even more attractive, offering returns of 11% to 14% for mid-sized companies, with special situation funds yielding up to 18%.
