ETMarkets AIF Talk| Performing credit emerges as core portfolio allocation

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The Economic Times daily newspaper is available online now. Read Today's Paper ETMarkets AIF Talk| Performing credit emerges as core portfolio allocation for investors: Amit DharodBy Kshitij Anand, ETMarkets.comLast Updated: Apr 16, 2026, 11:28:00 AM ISTSynopsis

India’s private credit market is emerging as a key part of alternative investments, supported by structural changes in lending and rising demand for stable returns. Once a niche, performing credit is becoming a core allocation, driven by a funding gap in mid-market firms and the flexibility of AIFs to provide customised financing.

India’s private credit market is steadily evolving into a significant pillar of the alternative investment landscape, driven by structural shifts in lending and rising investor appetite for stable, risk-adjusted returns.

In an interaction with Kshitij Anand of ETMarkets, Amit Dharod, MD – Alternative Assets at JM Financial Asset Management Ltd, highlighted how performing credit has transitioned from a niche strategy to a core portfolio allocation for investors.

He noted that a growing funding gap for mid-market companies, coupled with the ability of AIFs to offer tailored financing solutions, has accelerated the adoption of performing credit strategies.

With predictable cash flows, relatively lower risk, and increasing participation from domestic institutions and family offices, the segment is witnessing strong momentum and is poised for sustained growth in the coming years. Edited Excerpts –

Q) Since the introduction of SEBI’s AIF regulations in 2012, how has the private credit space evolved in India?

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A) Prior to the regulations, private credit market was dominated by NBFCs for mid-market lending and foreign capital for larger deals.

These regulations along with gradual shift by banks and NBFCs away from structured private credit lending post 2017, helped private credit AIFs emerge as major players in this space.

The market has also grown from generic lending to specialized strategies like performing credit, venture debt, special situations, and distressed debt, among others.

Q) Among the various AIF strategies—real estate, venture debt, buyouts, and special situations—what has driven the rising prominence of performing credit?

A) A large segment of mid-market companies that have good management, are profitable and experiencing high growth have had a wide gap in their capital needs that wasn’t always addressed by equity capital or traditional financing solutions.

Rising prominence of performing credit in AIF strategies can be attributed to the above, as well as -

1) Focus of Banks and NBFCs on largecap companies, retail loans, and short-term working capital facilities,
2) Ability of the AIFs to meet bespoke and tailored financing needs of corporates,
3) Regular and predictable cashflows for the investors with capital protection, and 4) increased appetite of Indian institutions and family offices for whom private credit allocations have shifted from tactical to a core portfolio allocation, providing superior risk-adjusted returns.

Q) Industry estimates suggest private credit investments grew 40–50% in 2025. Do you expect this momentum to sustain going forward?

A) The Indian private credit market is about 0.6% of the GDP which is significantly lower than many other large economies and is poised for multi-year growth backed by structural reforms as well as economic growth.

Need for flexible capital solutions by corporates in general and Growth capital requirements from mid-market companies continue to increase while on the other hand, there is significant rise in HNI/ UHNI segment along with institutional demand for alternative fixed income strategies.

We expect the growth momentum to continue in absolute terms for AIFs even as traditional financial institutions are becoming more active, particularly in areas like acquisition financing.

Q) Which sectors are currently witnessing the highest deal activity in private credit, and why?

A) Deal flow in overall private credit is dominated by Real Estate sector while for other credit strategies, sectors with high deal activity are utilities, infrastructure, healthcare and industrials among others.

We expect similar trend to continue albeit with higher demand from industrials in next couple of years.

Q) What makes performing credit different from other private credit strategies in terms of risk and return profile?

A) Performing credit is at times also referred to as direct lending as unlike some of the other credit strategies, primary reliance is on operating cashflows of the obligor/borrower.

Underwriting is more focused on company’s revenue generation ability, leverage, promoter’s track record and vintage and deals are senior secured structures with regular cashflows in the form of interest and principal repayment.

This approach helps reduce the risk arising from refinance in case of bullet repayment structures, capital market volatility or event driven monetization etc.

Hence, the strategy tends to deliver a stable, predictable and regular return combined with relatively low risk backed by adequate security.

Q) How do fund managers structure deals to align with the borrower’s cashflows and business cycles?

A) One of the key reasons of preference for private credit financing by borrowers is the ability to align the terms with borrower’s bespoke needs while ensuring tight covenants, monitoring and security structure.

Repayment structure is normally aligned with the company’s business performance through flexible amortization schedule, regular coupon and redemption premium while covenants specifically designed for that company taking into account various industry related factors as well.

Q) India’s private credit market is still small relative to GDP compared to global peers—what are the key factors that could drive its expansion?

A) In our view, some of the key expansion drivers for India are as below:
• Flexible debt solution requirements for growing number of profitable mid-market companies, which are currently under-served by traditional lenders.
• Relatively low access for lower rated companies to India’s primary bond market which is dominated by issuers with credit rating of AA+ and AAA.
• Growing Domestic investor base. Private credit funds provide superior risk adjusted returns over traditional debt instruments/options, allowing investors to diversify their portfolio.
• Improving enforcement regulations like IBC, macro environment, better corporate governance and continued push for economic and policy reforms will help further growth of the market as Indian private credit industry narrows the gap with global economies.

Q) From an investor’s standpoint, what are the key risks to watch out for in performing credit strategies?

A) There are multiple new performing credit funds are being launched. From an investor’s perspective, selection of the investment manager should be the most important aspect while allocating capital.

Experience of professionals managing the fund, institutional backing, governance, deal sourcing abilities, robust underwriting and monitoring process are important factors to keep in mind while selecting the fund manager.

Corporate balance sheets have improved significantly over the last decade and along with India’s strong growth, companies have achieved size and scale across geographies.

However, global developments could have cascading effect on certain sections of economy which could impact business for some of these companies. It is important to understand the investment manager’s approach towards portfolio construction and individual deal selection at such times.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
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