The private credit funds space is anticipated to grow significantly, according to Motilal Oswal Private Wealth. High net worth individuals (HNIs) and ultra HNIs are finding private credit funds to be a great investment class, it said.
Basically, private credit funds are collectives of actively managed money that invest largely in loans to private businesses with the aim of making a profit.
"Private Credit Funds are emerging as a great investment class for HNIs and Ultra HNIs," said Jayesh Faria, Associate Director, Motilal Oswal Private Wealth.
HNIs and UHNIs are gradually increasing their investments in private credit funds, which offer returns of 14% to 16% that are comparable to those of equity. By 2025, the private credit funds business is projected to increase by 10 times to ₹1.5 lacs crore from ₹10k crore.
Generally, these funds find and invest in businesses that have troubles. The main idea behind such investments is that these businesses have a good possibility of recovery and make payments. Fund managers will conduct their own analysis and consider cash flows, whether a firm is making a profit, the debt to earnings ratio, and the kind of collateral the company is able to provide.
Motilal Oswal Private Wealth is expecting extremely good growth opportunities in this space. The brokerage's private wealth business has already tied up with two or three fund managers to invest in such credit funds. It will raise additional funds from investors via alternative investment funds (AIFs) to invest in private credit funds.
Further, Jayesh Faria advised the investors that it is important that the fund be managed by a fund manager with sufficient experience and expertise in this area of debt investment.
He said that selecting the right credit opportunities fund is an important measure to control the level of risk. Technically, investing in private credit funds is for those investors who are willing to take on the risk of investing in low-rated debt securities offering high interest rates to earn higher returns than those offered by AAA-rated debt securities. However, it is ideal to limit your exposure to such funds to about 10% of your debt portfolio.
"The private credit financing industry is growing at a tremendous pace and I am seeing many investors are willing to invest in such funds. It’s preferable to select a fund with qualified team who has track records of doing such transactions in past, high corpus, which facilitates sufficient diversification, and their risk assessment process,” added Faria.
Credit opportunities funds give you the chance to increase the return on your debt securities, but doing so requires a higher level of risk-taking on the part of the investor. A small portion of your debt portfolio would be a prudent way to invest in these funds.