Markets with Bertie: Private credit rising
A few weeks ago, Bertie got pulled into an odd cricket match. The kids and their fathers in his apartment complex decided to have a ‘Lads versus Dads’ game. Although Bertie has no lads, he knows a few of the dads, so he turned up to watch this unique contest. As luck would have it, one of the dads dropped out at the last moment, and Bertie was pressed into service as an impact substitute.
The dads handily thrashed the lads, but what warmed Bertie’s heart was that every mom who had come to watch was unconditionally supporting the lads. Thankfully, Bertie will never know how it feels to see the love of your life cheering for the opposition, even if it is your own offspring.
After the game, while the lads moped with their moms, the dads did the predictable—headed to a bar for a post-match drink. Bertie got talking with two of the dads who worked with the same multinational firm that had recently set up shop to grow their private credit book in India.
Even in a noisy bar, Bertie’s curious mind is active. He asked his newfound friends what made their head office set up shop in India after all these years. “The asset class is nascent. Barely ten years,” said one of them, “but growing fast.” Bertie was told that the private credit assets in India had crossed $25 billion. “Heard of the recent construction company deal?” asked the other one. Bertie nodded. “3.5 billion. All private credit. No bank,” he said smugly.
Disintermediation threat
That intrigued Bertie, who started to worry if this was a new threat of disintermediation for bank lending. “So why aren’t the banks lending? It’s a large, respected company.” Too much regulatory oversight, the inability to stitch together structured deals, and a general risk-awareness after the non-performing assets (NPA) debacle of the last decade were cited as reasons. That made sense to Bertie.
“So, all your fund-raising is from the parent’s balance sheet?” asked Bertie. Our man is thorough. He wants to understand both sides of the balance sheet for any lending business.
“Not really. The seed came from the mother ship, but we have recently raised domestic money, too,” said one dad. As if on cue, the other one added, “That is where regulatory change is helping as well. After the tax laws were changed, debt mutual funds have become very unattractive for high-net-worth individuals. They want yield, and we can give that. Double-digit, post-tax. Easy!” This was followed by more smug smiles.
Bertie was now trying to piece it together.
The asset class seemed to be blooming on the soil of regulatory side-effects, with scant regulatory oversight acting as a fertiliser. Bertie also realised that the promised high returns in many of the deals were predicated on some form of equity capital raise by the investee company in the near future; generally, an initial public offering (IPO). Given how IPOs are being lapped up by retail and institutional investors alike, this party seemed to be in full swing.
While walking back home, Bertie realised that not only private equity guys, but even private credit guys, were banking on the robust Indian IPO market to keep the promises they had made to their respective investors. So much, Bertie thought, was being owed to so many by so few.
Bertie is a Mumbai-based fund manager whose compliance department wishes him to cough twice before speaking and then decide not to say it after all.
