Private credit typically refers to non-bank, non-publicly traded debt financing.
The private credit market in the U.S. has grown substantially over the past two decades and has become a major source of financing. Private credit in the U.S. has grown exponentially, from roughly $46 billion in 2000 to about $1.7 trillion currently. The initial trigger was the tighter regulatory regime for banks post the Global Financial Crisis but that tailwind gained momentum from the growth of private equity which leveraged debt financing for acquisitions, investors chasing yield in a low-rate world and greater investor democratisation. Retail investors in the U.S in fact now access private credit with as little as $1,000, leading to growing retail flows into such funds. Private credit funds in the U.S and Europe have become large and mainstream and provide credit to a complete range of corporate borrowers, from large to small.
The Asian private credit market is still relatively small with less than 5% of global market share. The corollary of this is that bank led credit is about a third to half of the total credit supply in the US and Europe but is over 70% in Asia, including India. Whenever an asset class grows this rapidly there will be issues that would arise. The main issues around the rapid growth of private credit in the U.S centre around the illiquidity of the investments, relative opacity and the systemic risk, since banks often finance these non-bank credit providers.
The Indian private credit market has also grown rapidly. The categories of providers of private credit in India include NBFCs, Domestic AIFs, Venture Debt funds, Foreign private credit funds and, more recently, Family Offices and UHNIs. Insurance companies and pension funds, which are large players in the U.S, are limited participants here because of the regulatory guidelines. This asset class is seeing growing traction on the demand side. The drivers of demand growth are the growth of the space banks and NBFCs can’t or are not keen to finance, underdeveloped bond markets, the ability of private credit providers to create customised solutions for borrowers, growth of private equity led transactions and increasing investor appetite for higher yielding fixed income instruments, especially after the change in taxation on fixed income funds. As a result, we have seen an increase in activity on the supply side too, with more AIFs coming into existence.
As India grows, the demand for credit will have to be met by a wider range of providers and the opportunity for private credit funds is therefore going to be large and attractive. With growth comes greater complexity and issues like liquidity, top quality governance and a strong focus on borrower quality will be key as private credit funds strive to become part of mainstream portfolios and a large asset class by itself.
