In recent years, debt or fixed income investments have seen some sheen come off their attractiveness with adverse taxation. Recent Budgets have removed indexation benefits from debt funds and gains made from all schemes are added to an investor’s overall income and taxed at the slab applicable with no distinction of long- or short-term holding periods.
Fixed deposits earn 7-8 per cent, most bond funds also tend to give up to 7.5-8 per cent on a rolling one-year basis over the long term. Credit risk mutual funds have given more than 9 per cent as a category over the last five years (the 10-year record is still modest at 6.5 per cent), but there have been episodes of defaults, and the category is risky.
Post-tax returns would be much lower in the above cases, especially for those in the highest slabs.
For HNIs (high net worth individuals) with the ability to digest risks, recent years have seen the emergence of private credit as a debt-like avenue via AIFs (alternative investment funds), with high double-digit returns.
Performing credit, high yield/distressed credit are broadly the categories of private credit. They take various forms and instruments.
Typically, a private credit deal has tailor-made interest and principal repayment terms, which are mutually negotiated by the borrower and lender (the AIF, in our case).
Private credit investments touched $9 billion in just the first half of 2025, according to an EY report. The private credit AUM as of March 2025 is estimated to be $25-30 billion, according to an S&P Global note.
For perspective, the private credit market was valued at around $3.6 billion in 2020.
In the aftermath of the NBFC crisis of 2018, lending institutions became increasingly focused on retail lending and consciously avoided funding many segments of the industry as also for equity buyouts, mergers & acquisitions and special situation financing.
This gave a solid thrust to private credit as an investment avenue via AIFs for the wealthy.
We explain what private credit investments entail, the likely internal rates of returns targeted, AIFs available in India, the risks involved and suitability for investors.
Funnelling investments
As indicated earlier, performing credit or cases, where there is minimal to no chance of a default, are the most popular private credit investments. The borrower repays the principal and interest on time. The loan given by the lender (AIF) is backed by significantly high collateral.
The first type of lending involves loan against shares (LAS) transactions, promoter financing etc. Lending is done against highly liquid stocks to well-regarded promoter groups with a sound reputation. The security cover is typically two-three times the amount of loan given out.
Next, we have the operating company borrowing and growth funding. Here again, promoters with strong pedigree and companies with large sponsors, say, reputed private equity firms holding stakes in the borrowing firm, are considered. Business cash-flow visibility is analysed thoroughly for liquidity issues and challenges. The security cover is typically two times the amount loaned.
Then there are cases where financing is done for mergers and acquisitions as well as private equity buyouts or providing exit to private equity players. All the criteria mentioned earlier for promoter quality, corporate governance etc. apply here. The security cover is 1.5-2 times the borrowed amount.
The relative security cover in performing credit depends on the riskiness of the borrower in this case.
The distressed debt option involves scenarios where the promoter and the company are leveraged, there is possibility of default, but also some scope for a sharp turnaround with some finance availability. These could also be cases involved in IBC (Insolvency Bankruptcy Code) proceedings.
Usually, distressed debt funding involves promoter financing, land acquisition and real estate. The borrower, typically the promoter or the operating company, is highly leveraged. There are sector risks with only limited supply of capital. The security is relatively weak.
Then there are special situations such as one-time settlement, promoter bailout and venture debt. The borrower has typically already defaulted and is seeking a one-time settlement. There is a turnaround strategy that is convincing for lending in such cases. There is little or no security backing up the lending.
Some examples
Mumbai International Airport Ltd (MIAL) secured $1 billion under private placement for upgrades and expansions at the airport in June and also for refinancing an earlier 2022 debt.
Shapoorji Pallonji concluded a $3.4-billion financing transaction in May, primarily to refinance existing debt.
Manipal Education and Medical Group raised $600 million from KKR and Clifford Capital for project financing in June.
TVS Group — TS Rajam Rubbers, TVS Mobility & Dhinarama Mobility — raised $194 million in February from Omers Capital, ICICI Prudential, Kotak PC Fund, DSP, Oaktree, Nomura, JP Morgan, Axis AMC, Arka Fincap, RV Capital, Nippon for refinancing and general corporate purposes.
One-time settlement in the case of RattanIndia Power is another example of private credit transaction. This deal also involved an asset reconstruction company backed by Varde Partners and Goldman Sachs.
What investors must know
In India, investing in private credit can be done by HNIs via the AIF route, as mentioned earlier. These are medium-to-high risk avenues.
Typically, category II AIFs are involved in private credit investments. The minimum amount required for investing in these AIFs is usually ₹1 crore. Employees, directors and fund managers of the AIFs could invest lower amounts of ₹25 lakh or so.
The minimum corpus of the AIF must be ₹20 crore.
Some of the asset management companies/groups that run AIFs offering private credit investment opportunities include ICICI Prudential, Aditya Birla Sun Life, Sundaram, ASK, Avendus, Incred, Motilal Oswal, Prabhudas Lilladher, Vivriti and a few others.
It is the returns part that is meaty for investors.
A survey done by EY with senior leaders, who participated in high yield and performing credit, showed that half the respondents focused on deals offering 12-18 per cent IRR, while the other half targeted 18-24 per cent IRR. The report further indicates that many of the deals done in H12025 have an IRR of 18 per cent or more.
Real estate, manufacturing and energy are reportedly the top three sectors fund managers are bullish on.
There are some points to be noted here by investors considering AIFs taking exposure to private credit.
First, the fund you invest in is likely to be close-ended with a lock-in of three-five years, as that is the period the fund manager is believed to take to realise the IRRs mentioned earlier. Daily or periodic returns are not generally disclosed due to the nature of the product.
Second, the fund manager may indicate an IRR to investors, which may or may not be achieved. There could also be cases where returns are linked to external rate benchmarks,
Third, AIFs have a regular expense ratio. Many are also likely to have performance-related charges. For example, there could be profit sharing of 10-15 per cent if the IRR is more than, say, 12 per cent.
Fourth, the non-performing assets (NPA) cycle has moderated over the past several years and especially after Covid-related relief measures announced by the government and the RBI. If the NPA cycle reverses, there could be defaults and the once-performing credit could get strained, affecting IRRs for investors.
Fifth, even as an HNI, you will need to keep asset allocation in mind and manage risks carefully by allocating only a portion of your debt portion to such avenues.
Published on October 9, 2025
