India's Private Credit Market Sees Surge in HNI and Family Office Interest

High-net-worth investors (HNIs) and family offices in India are showing a strong appetite for the private credit market, mirroring global institutional investor trends. This asset class offers attractive high yields, presenting a compelling alternative for sophisticated investors compared to volatile equity markets.

Asset managers such as Edelweiss Alternatives are actively tapping into this domestic investor base, including wealthy individuals and family offices through wealth platforms. The firm has observed a significant increase in domestic capital for its private credit funds. For instance, its Special Situations Fund raised in March 2024 received nearly 50% of its capital from domestic sources, a substantial jump from its previous fund (Fund 2), which had only a 10% contribution from domestic clients.

India's growing population of ultra-high-net-worth families and individuals, estimated to rise to 19,000 by 2028 (from 13,000), is a key driver. This domestic fundraising trend is further supported by favorable regulatory conditions in GIFT City and tax incentives for Special Economic Zone (SEZ) structures, aiding private credit managers in onshore capital raising. Experts anticipate that by 2027-2030, Indian family offices could allocate 8%-12% of their investment portfolios to direct private credit, a significant increase from their current modest share.

Private credit emerged as an asset class following the 2008 Global Financial Crisis, as banks tightened lending. It provides borrowers easier access to capital and financiers higher yields, albeit with a higher risk profile.

Edelweiss Alternatives is reportedly working on a new private credit fund exceeding $1 billion. Performing credit investments in this new fund are expected to generate internal rates of return (IRR) of 16-18%. Their previous $900 million fund invested in 17 deals across sectors like airports, chemicals, and steel, achieving mid-teen returns upon exiting 12 of those deals. This compares to public market debt rates of 9-12% for slightly lower-rated Indian companies.

A track record of successful fund management spanning 10-15 years by sponsors has instilled confidence in domestic HNIs and family offices regarding this asset class.

Impact:

This trend signifies a maturing Indian alternative investment landscape. The increased participation of domestic HNIs and family offices provides a vital alternative funding source for businesses, potentially boosting deal flow and growth within the private credit sector. It also offers sophisticated investors attractive risk-adjusted returns.

Rating: 7/10

Difficult Terms:

High-net-worth investors (HNIs): Wealthy individuals with significant investable assets, typically above a certain threshold (e.g., $1 million or more).

Family offices: Private wealth management advisory firms that manage the financial affairs of ultra-high-net-worth families.

Private credit market: A debt market where funds are loaned directly to companies through bilateral negotiations, often at higher interest rates than public markets. It is not publicly traded.

Institutional investors: Large organizations such as pension funds, endowments, insurance companies, and sovereign wealth funds that invest significant capital.

Asset class: A type of investment or category of financial assets, such as stocks, bonds, real estate, or commodities.

Vintages: Refers to the year a fund is established or begins its investment period. Funds are often categorized by their vintage year.

Bilateral negotiated debt market: A debt market where loan terms and conditions are directly agreed upon and negotiated between two parties – the lender and the borrower.

Significant premiums: Returns or interest rates that are considerably higher than standard market benchmarks.

Public market reference benchmarks: Standard market indicators (e.g., government bond yields, corporate bond indices) used for comparison of investment performance.

Regulatory tailwinds: Favorable government policies, regulations, or legal frameworks that support and encourage growth in a specific industry or sector.

GIFT City: Gujarat International Finance Tec-City, a central business district and international financial services center in Gujarat, India, offering tax and regulatory benefits.

SEZ structures (Special Economic Zones): Designated geographical regions within a country that have different economic and business laws (e.g., tax incentives, streamlined regulations) to promote investment and exports.

Onshore capital raising: The process of raising funds within a company's home country, as opposed to offshore.

Investment corpus: The total sum of money an individual, family, or institution has designated for investment purposes.

Global Financial Crisis (GFC): A severe worldwide economic crisis that occurred roughly between 2007 and 2008, originating in the U.S. subprime mortgage market.

Elevated risk assessment: A higher-than-normal evaluation of the potential risks associated with a specific investment, loan, or project.

Publicly traded instruments: Financial products that can be bought and sold on public exchanges, like stocks or bonds.

Higher risk weighting: A higher score assigned to an investment's risk level, often influencing regulatory capital requirements or pricing.

Internal Rate of Returns (IRR): A discount rate at which the net present value (NPV) of all cash flows from a project or investment equals zero. It's a measure of a project's profitability.

Performing credit: Loans that are currently being repaid by borrowers according to the agreed terms and are not in default.

Mid-teens RoI (Return on Investment): Indicating an average annual return on investment within the range of 15% to 19%.