Expensive Debt Better Than Idling Biz, Experts Sum Up Private Credit Popularity

Shapoorji Pallonji Group sealed India’s largest private credit deal of $3.5 billion through an interesting zero-coupon bond, where lenders will hold it until maturity. This is a rescue remedy for the stressed group with interests across real estate, energy and financial services.

On the other hand, one of the country’s few female self-made billionaires Kiran Mazumdar Shaw, recently said that her ‘strong’ Biocon Biologics business’s profitability is being dragged down because of the structured venture debt.

Private credit seems risky to both givers and receivers alike. SP Group’s lenders have to contend with ‘not freely transferable shares’ it holds in Tata Trusts, while Biocon had to later raise Rs 4,500 crore via QIP to raise promoters’ stake in its subsidiary. Yet, private credit is taking off in India, even for the education major Manipal Group which raised $600 million in yet another mega deal to finance its healthcare business.

Private credit serves growth capital needs, acquisition finance, early real estate and even special situations that banks do not, as they never bet against the odds.

“There are situations where families behind businesses go through internal realignments — say one member wants to monetise their stake while another wishes to consolidate control. Traditional bank funding often doesn’t accommodate such nuanced, time-sensitive needs. That’s where private credit steps in. In one such case, private credit enabled a promoter to acquire a strategic stake, and as the business value soared, the debt was comfortably repaid,” said Venkatakrishnan Srinivasan, a debt market expert and founder of Rockfort Fincap LLP.

Debt Helps Promoters Hold Onto Equity

In a world without private credit, the aforementioned promoter would have had to forego equity and probably even lose control it. The credit option saved them from an equity investor who would have otherwise wrested off a part of the control.

“Non-equity dilution for funding needs ensures a higher retention of equity with the promoters/current shareholders,” said Mitesh Shah, CEO of Equirus Credence Family Office. It is also used in cases where equity markets are dry or much more expensive than debt.

Businesses need capital no matter what the market scenario. When the markets are choppy, companies may face hurdles in raising private equity or IPO the business.

“This is an area for private credit players to step in and possibly get refinanced by equity at a later date or get paid from business cash flows,” said Karthik Athreya, director and head of strategy — alternative credit at Sundaram Alternates.

As more such special cases emerge, the private credit market, which was once relegated to collateral-based funding such as loan against property (LAP) in 2012, has now emerged into a $10 billion market as of 2024, as per a PWC report ‘Tapping private credit opportunities in India’. It saw more than 10 times the growth in terms of market size and is now estimated to be at $25 billion.

In the first half of 2025 has already logged around $6 billion in private credit transactions, as per 1Lattice. “India’s private credit market has expanded sharply, with deal value rising from roughly $3.5 billion in 2021 to about $9.2 billion in 2024 — an annualised growth rate of around 27%. Borrowers are flocking to these structures because they close quickly and can be customised,” said Amar Choudhary, CEO, 1Lattice.

Domestic Capital Rises

Earlier, only foreign funds would chase such deals, but now domestic capital is aiding their growth with the rise of AIFs, structured as Category II AIF investments governed by the markets regulator, the Securities and Exchange Board of India.

“The pool of capital and structures available in private credit have expanded to meet diverse requirements of companies through flexibility on tenor, structure and repayment schedules,” says Shah.

While large deals make news, deals of all sizes are being executed with the potential for more. “Private credit is being raised through bespoke deals for a variety of end uses. The Indian private credit market witnessed 15–16% growth in value and volume in 2024 with a forecasted growth rate of about 25–30%,” says PWC.

Apart from turnaround working capital, loan buyouts, interim financing, PWC sees more avenues for private credit, such as litigation funding- wherein legal proceedings can be financed in return for a share of the settlement. Even newer sectors like renewables see a lot of private credit deals, but most of them are still wary of startups.

“Private credit firms generally prefer not to lend to early-stage and growth-stage startups due to the high risk and uncertainty associated with these businesses. When industries face rising loan defaults, falling profits, and cash flow issues, it creates "sectoral stress" that makes lenders nervous about lending to similar businesses,” said Amar Choudhary, CEO, 1Lattice.

Choudhary quotes the example of the microfinance sector, where bad loans have jumped to about 16% by 2025, making lenders worried about giving unsecured loans to small businesses and startups who might also struggle to pay back. “Digital lending companies like Fibe and Kissht are also seeing more customers defaulting on their loans. However, these private credit funds do provide venture debt to late-stage companies, particularly those nearing an IPO,” he adds.

‘Borrowers Need Clarity @ Such Rates’

There is demand as well as supply for private credit, the only conundrum being costs. The costs vary across grades of credit from 9-10% for high-grade debt and swing to as high as 20-23% for distressed and special situations.

“Performing credit managers are expected to generate a gross return of around 14-15% and a net investor return (i.e. post fees, pre-tax) of around 11-13% in today’s interest rate market. If there is an upward bias for rates, then returns from ‘performing credit’ could go up correspondingly,” explains Athreya.

For higher-yielding strategies such as real estate and special situations, investor expectations tend to range between around 16-18% gross and 14-16% net. Mezzanine funds, venture debt, stressed assets and equity-type deal structures with back-ended (i.e. non-current yield) income and capital distributions are expected to generate around 20-23% gross and 18-20% net returns.

With such expectations from investors, it could also stress a company, as indicated by Shaw. However, experts insist that such expensive debt must be taken with clarity from the borrower, and must not be taken only to tide over bad times, which becomes a burden. When bank lending is either slow or rigid, private credit turns into a necessity.

“In some cases, high-cost debt can be a lifeline. If a promoter genuinely believes in the business turnaround, taking a calculated bet on more expensive funding may be wiser than missing a critical window,” Srinivasan says.

He recalls a pandemic-era case where a promoter had to raise funds at a very high cost to exercise stock warrants before expiry. “Letting the deadline lapse would have meant losing a long-term strategic advantage. Instead, they took the bold step, the equity markets bounced back, the business performed well, and the debt was pared down quickly,” he adds.