Fireside Chat Speakers:
Piyush Gupta, Head of Credit Markets, Investec India.
Deepak Padaki, President, Catamaran.
“Private Credit has been an under-allocated asset class in the portfolios of Family Offices globally relative to institutional portfolios. In India, family offices have just about started warming up to this asset class in the last couple of years, with allocations further getting a fillip by the removal of LTCG tax break on Income Funds last year” said Piyush Gupta, Head of Credit Markets, Investec India.
Private Credit, particularly in the Performing Credit segment, offers the potential for higher yields compared to traditional fixed-income products. Additionally, it can provide more consistent and predictable returns than public equities, making it a valuable addition to investment portfolios. Low correlation to public markets, less volatility with respect to benchmark interest rates movement and regularity of returns makes it an asset class hard to avoid, especially in today’s macro context.
Mr. Gupta further added “True performing credit strategies look to invest in credits of performing businesses which have had sustained profitability and have a track record of free cash flow generation with moderate leverage on balance-sheet and quality sponsor pedigree. The investments typically need to be carefully structured with a tight, enforceable security structure along with appropriate lender protections and a tailored set of covenant suite specific to each investment case. A well-managed performing credit strategy can generate consistent, reliable and enhanced returns for its investors.”
Of late, amongst the alternative asset classes, private credit has somewhat become the flavour of the season, leading to innumerable new private credit fund platforms coming up in India.
However, family offices investors will do well to start differentiating between managers and strategies as not all private credit strategies are similar. Some are not cash flow-focused strategies and entail higher risk than the others, while targeting higher returns.
Similarly, investors need to be discerning while choosing a manager. The key to generating alpha in performing credit is in avoidance of capital losses. Managers who have a long and successful track record of underwriting credit risk are likely to perform much better in the medium term than the ones who have taken to the asset class of late just because of investor demand.
Investors should be careful before selecting managers who do not invest and manage credit as their core asset class and have only added a private credit strategy as an additional/ adjacent asset class to their platform.
Another under-appreciated aspect when choosing a manager is their ability to originate deals independently, rather than relying on market intermediaries. When relying on intermediaries, there is a risk of diluting credit protections or mispricing risk, which is invariably the collateral damage of a deal win.
A well-managed private debt portfolio will typically witness a very high rate of prepayments, which at least in the initial part of a fund’s life will have to be reinvested. This is why origination and deployment ability become a key differentiator while selecting the manager.
In his concluding remarks, Mr. Gupta added “All in all, private debt is an asset class which certainly merits higher allocation in family office portfolios given its ability to generate consistent returns as borne out by lower dispersion rates in its returns globally over the last decade, along with lower volatility cause-effect correlation with larger macro variable set, interest rates etc. as compared to public asset classes — both equities and debt.
Given the heavy lifting required in originating, structuring, diligence, negotiating, executing and monitoring private credit investments, it is not an asset class that is very amenable to “do-it-yourself.” Hence, carefully selecting the manager and the strategy becomes critical to get it right. The devil, as they say, lies in the diligence and that goes as much for the investor as it does for the manager.”
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