Growth of private credit can deepen bond market: Srini Sriniwasan, MD, Kotak Alternate Asset Managers 

We started the fund in late 2017. Until about December 2018 we had done one investment, because we were figuring out what the market was like. I’d say the environment conspired to make it really special, because COVID happened. During that 20-month period till mid-2021, while investors globally had put their pens down because they were reading horror stories from the western world, we trusted our ability to come out of the situation, and deployed $700 million, which helped us build a high-quality portfolio of investments. The other situation is where we know we are getting into solid assets, where we would have a control position. For example, we bid for a fully built and functional road asset and an office building, which we bought through the IBC route. We have completely repositioned and changed it (office building). We could do that because we have skills in infrastructure and real estate. Our combined strength differentiates us.

It is an area where we continue to operate. Strategic situation funds allow us to operate where conventional means of financing is either not available or doesn’t work. We target an exit between two-five years. Often, such transactions are structured in a way that our cost of capital may be seen as high, and the borrower is keen to square the position. 

We have stayed away from debt aggregation risk because there is no guarantee of a timeline to the process. Also, the price at which we want to be invested as against a strategic buyer, will be higher than that of a financial buyer. The moment you choose the IBC path, you must be prepared to invest a significant amount of time. I don’t think we can pursue one transaction for two-and-a-half years, when most of our investment funds have an investment period of three years. 

Not really and not in the Indian context. There are industries and companies which can’t access the banking system. In many cases, the banking system is slow or doesn’t have the time of day to understand the business or is risk averse. Let’s take a consumer product company. It’s typically an asset light business. It will not have many hard assets to collateralise. The asset value would actually be the brand. No bank lends against the collateral of a brand. 

Right now, alternate credit competes with NBFCs. It will go through a phase where they will provide credit to NBFCs. Private credit is aggregating HNI investor money and channelising it in an organised fashion, through people who have the skill set to underwrite credit risk. This is phase one.  Phase two is when the market becomes better and deeper, and collaborates with banks and other lenders. Private credit funds have a higher risk appetite compared to other lenders. They will collaborate in a situation where the lower risk appetite lender will probably be senior debt and private credit may be junior, and together they can solve the borrower’s volume problem. 

From a portfolio allocation viewpoint, families and large investors should allocate towards alternate assets. The percentages can vary, based on risk appetite. What we have done so far is we have built the business substantially on the back of global institutional capital, because the domestic market is not deep and large enough. But this has changed over the last 15 years. We have now reached a certain inflection point where you will see us doing more in the domestic market (fund raises) with our established track record that we have run with global governance standards and transparency. 

Growth of the private credit market is the biggest boon for deepening the bond market. Now, we have a platform that aggregates high risk appetite capital and institutionalises the investment into the bond markets. Bonds are that much more easily understood today than earlier. Take the case of the trouble in debt mutual funds. If there were a whole bunch of private credit funds at that time, they would have picked up those bonds, because, by definition, a private credit fund can only invest in securities, and not in loans.