By Mahesh Nayak
India’s private credit market, a high-yield safe-haven for investors, is now grappling with return expectations. As the asset class matures and attracts a broader mix of players from institutional stalwarts to wealth managers to mutual fund-led AIFs, the competitive intensity has surged, compressing yields and reshaping the economics of deal-making.
Over the past year, the internal rate of return (IRR) in performing credit has declined by nearly 100 basis points, with many funds now operating in the 13–14% range, down from the earlier 15–16% benchmark. Priyam Kedia, senior fund manager at Vivriti Asset Management, said, “It’s a strategic recalibration due to softer consumption trends and export volatility. In our third generation of funds, we are targeting 15.5% IRR, compared to 16-16.5% in our second fund, as our thesis has moved from cash flow to cash flow plus security for downside protection.”
Kedia said it’s back to basics, protecting your downside with collateral and accepting slightly lower returns amid concerns over cash flows. “This erosion is not merely cyclical, it reflects a structural shift driven by aggressive underwriting, faster closures, and a dilution in covenant discipline, said a senior fund manager from the domestic alternative fund.
“In the race to deploy capital, some managers are compromising on collateral quality and monitoring rigour, raising concerns about long-term portfolio resilience,” he added.
A major disruptor in this landscape is the entry of mutual fund platforms into the AIF space. Armed with expansive distribution networks and brand equity, these players have recalibrated the fee-sharing model. Distributors now command 60–65 basis points (bps) out of the typical 150 bps fee pool, leaving fund managers with limited room to invest in diligence and governance. This shift has tilted the balance towards product push rather than investor suitability, with distributors prioritising commissions over credit quality.
Sources said HDFC Mutual Fund is launching its new AIF performing credit fund. ICICI Prudential AMC, Axis Mutual Fund, Nippon Mutual Fund and Kotak Mahindra Mutual Fund are the other AMCs that have already entered the AIF fray with credit funds.
The proliferation of funds, many targeting similar mid-market borrowers, has led to a crowded pipeline of deals, often closed within 10–15 days.
Thyagesh Baba, director at Spark Capital Advisors, said, “While speed is celebrated, it comes at the cost of underwriting depth. Institutional managers with legacy experience and robust processes are increasingly distinguishing themselves from wealth-led platforms that prioritise scale and velocity.” Despite a lot of money chasing assets, the majority of it is refinancing of the existing loans, the senior fund manager added.
Despite these pressures, investor interest remains strong. Family offices and HNIs are allocating 7-9% of their portfolios to private credit, up from 2–4% just a few years ago. The segmentation within AIFs—across performing credit, stressed assets, and real estate-backed strategies—is becoming more nuanced, with investors seeking tailored exposure based on risk appetite and liquidity preferences.
“The chase for yields post the removal of indexation in mutual funds has been the reason for HNI money flowing into private credit,” said Nilesh Dhedhi, managing director & CEO, Avendus Finance. He believes that after investors have tasted success in lower-return paper, their appetite has increased and they are investing in funds seeking 18-22% return.
Yet, the risk-return mismatch is becoming more pronounced. Some funds are chasing IRRs by dipping into stressed or asset-light deals. In contrast, others maintain discipline by focusing on companies with EBITDA profiles above `75–100 crore and insisting on 3 to 4 times collateral coverage. The divergence in strategy is setting the stage for a shakeout, where only those with strong monitoring and workout capabilities will endure.
Baba of Spark Capital Advisors believes, “The private credit market is poised for exponential growth, potentially expanding 5 to 10 times over the next decade. But this trajectory hinges on maintaining underwriting discipline, improving investor education, and recalibrating distribution incentives. Without these guardrails, the very promise of private credit as a bespoke and risk-adjusted solution gets diluted in the pursuit of scale.”
