Private credit funds: How they are a lucrative opportunity for high net-worth investors

With the private credit market expanding rapidly and providing attractive alternatives to traditional fixed-income investments, HNIs stand to benefit significantly.

Apart from listed corporate bonds and corporate fixed deposits, a wide range of fixed-income products are available through mutual funds. These also include private credits. In recent years, private credit funds have transformed the investment landscape, providing high net-worth investors with a fresh approach to fixed-income portfolios. The sector has seen a staggering growth of 24% YoY, with the size of the category II AIF market now at Rs 6.96 trillion. This surge indicates a paradigm shift in the way investors approach fixed-income investments.

Highlights:

• Private credit funds promise potential annual returns of 13-20% for high net-worth investors.

• They provide essential financing for lower-rated corporates, driving growth.

• Investors can expect tailored investment strategies based on a company's life cycle and specific cases.

• While private credit offers higher interest rates, it's important to note its lower liquidity than other forms of credit.

• Private credit emerges as a tax-efficient alternative in the face of recent tax reforms, optimising returns for affluent investors.

What can high net-worth investors anticipate?

1. Enhanced returns and diversification

Private credit products offer a unique value proposition, yielding 13-20% per annum returns, outperforming traditional fixed-income investments. High net-worth investors gain access to well-diversified portfolios managed by experts, strengthening their wealth accumulation.

Also Read: Breaking boundaries: HNIs can now invest abroad beyond the LRS limit and TCS 

2. Addressing the credit gap for corporates

With banks' exposure to retail segments hitting 33%, a significant opportunity arises for private credit funds to fill the gap for lower credit-rated corporates. This win-win situation provides crucial financing for SMEs and mid-market companies while yielding substantial returns for high net-worth investors.

3. Customised investment strategies

Private credit funds present a versatile array of investment strategies. They can focus on different stages of a company's lifecycle, from start-ups to well-established businesses. Additionally, funds may specialise in specific use cases like mergers, acquisitions, or capital expenditures, offering tailored solutions for high net-worth investors.

4. Managing risk and liquidity considerations

While private credit funds present higher interest rates, they have lower liquidity than other credit forms. High net-worth investors should be prepared for a defined investment period. Unlike traditional options, early redemption might not be permissible, emphasising the need for a long-term commitment.

5. Tax efficiency in a shifting landscape

Recent tax reforms have altered the attractiveness of traditional debt instruments. Private credit now emerges as a tax-efficient alternative for affluent, high net-worth investors seeking to optimise their returns. This transition prompts a reevaluation of the risk-reward dynamics of credit investment.

The Bottom Line

High Net-worth Investors seeking enhanced returns in fixed-income portfolios should consider the benefits of private credit funds. As the Indian economy is growing, investing in private credit funds focused on working capital and capital expenditure for the next three to five years could be prudent.

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Also Read: The Rise Of Passive Investing In India: HNIs Lead The Way, While Retail Investors Hesitate

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.