In the latest episode of The Current Account Podcast, Hamsini Karthik delves into the intriguing world of private credit, a topic gaining popularity in financial circles. Joined by Manisha Shroff, a partner at Khaitan & Co with extensive expertise in the BFSI space, the podcast aims to shed light on private credit and its significance in the financial landscape.

Private credit is essentially non-bank lending, facilitated by various players, including private equity credit funds, alternative investment funds (AIFs), and foreign portfolio investors. Unlike traditional bank loans, these high-yield securities are tailored to meet the funding needs of sectors not adequately serviced by banks. Startups, mid-sized companies with good projections but low credit ratings, and projects in the infrastructure and renewable sectors are among those that can benefit from private credit.

Manisha explains that private credit instruments are not easily tradable due to their unique features and illiquid nature. They are structured as debt or hybrid instruments with seniority over other debts and are typically secured with collateral. The interest rates tend to be higher than those of bank loans due to the higher risk involved. However, they offer flexibility, allowing borrowers to repay the funds once their financial situation improves.

One key aspect of private credit is the presence of stringent covenants. These protective clauses are designed to ensure that lenders receive their returns even in challenging situations. They may include provisions for collateral, pledges of shares, change of control of a company, or special purpose vehicles for real estate projects. Regular financial testing is conducted to monitor compliance with the covenants.

As the market for private credit grows, many investors prefer listed debt instruments to gain additional benefits, such as sarfaesi rights, enhancing their secured creditor position. The current market size of private credit transactions is significant, with over $5.3 billion recorded last year. Projections indicate continued growth, with funds setting aside billions for future investments.

While some speculated that private credit might eventually become a substitute for equity funding, Manisha explains that equity investments involve promoters diluting their stakes, which is not the case with private credit. It offers a win-win scenario for both investors and borrowers, with returns realised at the time of entry and no need for dilution of equity for promoters.

Listen in to know more.