Houlihan Lokey – India private credit update, Summer 2023

The alternative asset market in India has created opportunities for private credit, which has emerged as a significant asset class. Private credit solutions from global and domestic alternative investment funds (AIFs) are gaining prominence over traditional lenders such as banks and nonbanking financial companies (NBFCs). Private credit AIFs in India have attracted both domestic and foreign capital, despite regulatory and macro challenges. This asset class offers fixed-income returns for sophisticated investors comfortable with the risk-reward profile. Private credit lending is characterized by its speed, flexibility, and bespoke nature. Unlike traditional lending from banks and NBFCs, private credit provides a more tailored solution for borrowers at different stages of their lifecycle. While India offers diverse opportunities for private credit, it is worth noting the growth of mainstream private credit in other markets. In the US, private credit has grown significantly, with direct lending constituting a large portion of the market. Although the US private credit market has faced challenges such as deteriorating credit quality, lenders in India continue to target borrowers with low leverage and steady growth. India provides a diversification strategy for lenders in an underserved market, regardless of the interest rate environment in developed markets. This paper will delve into the fundraising and valuation environment of private credit in India, focusing on the sourcing, underwriting, and management strategies involved in tracking and reporting returns. All AIFs, including private credit, are responsible for reporting fair value to investors. Enhanced valuation processes are necessary to provide reliable information and identify potential credit events before they occur.