PMS Bazaar conducted another episode of the Sundaram Alternate Series -Season 2- Episode 6 “Credit Funds in 2025: Trends & Opportunities Fixed Income Investments”.

To shed more light on these factors, had an enlightening discussion with Mr. Arjun Nagaraj, Chief Economist and Communications Manager, both from Sundaram Alternates Assets.

Excerpts from the interview

In the latest episode of Alternet Universe (Season 2, Episode 7), host Mr. Arjun Nagarajan engaged in a thought-provoking discussion with Mr. Karthik Athreya. The conversation revolved around the increasing popularity of rated performing credit funds among both institutional and individual investors. During the discussion, they extensively covered Sundaram’s Performing Credit Opportunities Fund, referred to as Peak Off throughout the session. The primary focus of their conversation was the broader credit space, specifically private credit.

Sundaram Alternates' Private Credit Track Record

Before diving into the core topic, Mr. Arjun Nagarajan presented some significant statistics regarding Sundaram Alternates' track record. He acknowledged that, coming from an equities background, he was previously unaware of these figures. Sundaram Alternates’ private credit has maintained a track record of seven years, raising approximately ₹3,100 crores across five Category II Alternative Investment Funds (AIFs). Notably, ₹3,500 crores have been invested in 65 deals with zero capital loss. He emphasized the importance of this aspect, stating that achieving such consistency in returns is rare. Additionally, the fund has been closing at 17–17.7% gross investor returns.

The Market for Alternate Credit

Mr. Arjun Nagarajan shared broader market statistics, stating that the alternate credit market in India is valued at roughly $80 billion. With the country’s economy growing at over 6% in real terms and above 11% in nominal terms, the private non-bank credit market is estimated to be between $10 billion and $23 billion, with a CAGR of 10–15%. He highlighted that while private credit is already prevalent in infrastructure, manufacturing, education, healthcare, and other service sectors, a considerable credit demand remains unmet by traditional banking and capital markets.

The Role of Peak Off in Sundaram’s Portfolio

During the discussion, Mr. Arjun Nagarajan noted that Peak Off was the latest addition to Sundaram's product portfolio. He expressed gratitude to Mr. Karthik Athreya for taking the time to share insights, stating that as a newcomer to the private credit domain, he would rely on Mr. Athreya’s expertise to provide clarity to both himself and the audience.

The Importance of Zero Capital Loss

Highlighting a crucial point, Mr. Arjun Nagarajan reiterated that the zero capital loss track record of Sundaram Alternates stood out for him. He sought Mr. Karthik Athreya’s perspective on why this aspect was significant and how Sundaram’s experience in private credit had led to this achievement.

Understanding Private Credit Segments

Mr. Karthik Athreya responded by first contextualizing private credit, explaining that the space is broadly divided into three categories:

1. Moderate-Yield Credit Funds (11–14%): These funds typically involve high visibility of cash flows, making them a safer investment. Many prominent funds such as ICICI, Axis, and Sundaram’s TOF operate in this category.

2. High-Yield Credit Funds (14–17%): This category includes corporate credit strategies, such as acquisition financing, restructurings, and asset buyouts. Sundaram Alternates has largely operated in this space, offering investors returns between 15–17%.

3. High-Risk, High-Return Credit Funds (17–20%): These involve distressed asset investments, early-stage Greenfield projects, and equity-like risk situations.

Beyond these, he mentioned that credit strategies offering 20%+ returns often resemble equity investments, with global players like Apollo and Oaktree leading such funds.

Sundaram’s Definition of Performing Credit

Within these categories, Mr. Karthik Athreya elaborated on Sundaram’s unique approach to performing credit. The firm had successfully executed over 60 transactions, deploying close to ₹4,000 crores without any capital loss. He attributed this success to two guiding principles:

1. Sundaram Finance Sponsorship: Sundaram’s private credit funds are directly sponsored by Sundaram Finance, a AAA-rated entity with a legacy spanning seven decades. This association brings strong risk management, credit discipline, and a culture of capital protection.

2. Operational Oversight from Sundaram AMC: Sundaram Alternates operates under the asset management umbrella of Sundaram Asset Management Company (AMC), ensuring that all investments adhere to strict asset management principles.

Risk Management and Investment Strategy

Mr. Karthik Athreya explained that the stringent risk management framework inherited from Sundaram Finance plays a key role in safeguarding investor capital. The firm follows a structured approach to downside protection while ensuring high-yield returns. He noted that every transaction undergoes rigorous credit evaluation, risk mitigation, and structured security measures to prevent losses.

The Growing Need for Private Credit

As the conversation progressed, Mr. Arjun Nagarajan pointed out that an increasing number of investors are turning to private credit funds due to the limitations of traditional banking systems. Mr. Karthik Athreya agreed, stating that private credit funds have the flexibility to fund complex transactions where banks and NBFCs hesitate due to regulatory constraints. This flexibility has fueled the rapid expansion of the private credit market in India.

Summing up the discussion, Mr. Arjun Nagarajan acknowledged that the insights shared by Mr. Karthik Athreya provided a comprehensive understanding of the private credit landscape. He reiterated the key takeaways, including the market potential, structured investment approach, and the significance of zero capital loss. As investors continue seeking alternative sources of high-yield returns, performing credit funds like Peak Off are poised to play an integral role in the evolving financial ecosystem.

Backing Strong Companies with Sound Financials

Going forward Mr. Arjun Nagarajan and Mr. Karthik Athreya, the focus was on the strategy of backing companies with solid financial standings. Mr. Athreya explained that their investment approach prioritizes firms with strong leverage ratios, stable income generation, and consistent profit growth. He elaborated that the fund operates under an extensive set of criteria, approved by investment committees, ensuring it serves as a reliable proxy for portfolios rated Single A or Triple B plus.

Mr. Athreya stated that while a Single A-rated investment typically yields around 10.5% gross, the objective of this fund is to generate approximately 15% gross returns. Post-fees, investors could expect returns between 12.5% and 13.3%, providing a substantial premium of 200–350 basis points over conventional fixed-income investments. He emphasized the importance of maintaining a diversified portfolio of 10 to 12 transactions to mitigate risk while consistently generating returns.

The Concept of Performing Credit in Investment Strategies

Discussing the term "Performing Credit Opportunities Fund," Mr. Athreya mentioned that this designation reflects the fund’s focus on secured investments with consistent income generation and risk-adjusted returns. He highlighted that at least 51% to 65% of the portfolio comprises companies rated Triple B plus and above.

He further shared that Vell, the fund manager, manages a pipeline of Single A companies where negotiations aim for interest rate structures yielding close to 15%. He attributed these attractive premiums to well-structured deals and specific end-use scenarios identified by the fund.

Ensuring Growth-Oriented Financing

Mr. Athreya elaborated that financing decisions prioritize companies that utilize funds to enhance revenue, profitability, and overall business value. The financing must directly contribute to business growth rather than being used for non-productive purposes such as land purchases or shareholder buybacks. This strict approach ensures that value remains within the entity, benefiting both the fund and its investors.

He acknowledged that while the approach may seem straightforward, implementing it in the market is challenging. Many so-called "performing credit" investments involve funding early-stage land acquisitions, promoter buyouts, or other non-value-accretive activities, which their fund avoids. Instead, their model emphasizes lending to high-quality companies and closely monitoring end-use applications to ensure value addition.

A Unique Value Proposition and High Ratings

Mr. Athreya emphasized that their strategy offers a distinctive value proposition, aligning with the fund’s Double A+ rating. He explained that the rating is based on three key factors: stringent investment criteria, a strong track record, and significant sponsor contributions. He highlighted that Sundaram Finance consistently contributes over 15% to each fund, a far higher percentage than the industry norm of 5% to 10%. This commitment reassures investors of the firm’s confidence in its strategy.

Evaluating Risks in Credit Investments

During the discussion, Mr. Nagarajan raised concerns about the safety of investing in lower-rated credit spaces. He noted that India’s corporate bond market is expected to reach $700–800 billion by 2025, with most investments concentrated in Triple A and Double A-rated securities. With inflation at 5% or higher, he questioned whether lower-rated investments carried significantly higher risks.

Responding to this, Mr. Athreya acknowledged that while Triple A investments are generally perceived as safer, historical data suggests that many high-profile defaults have occurred in this category. He cited past instances of financial failures in Triple A-rated firms, emphasizing that ratings serve as a guidance tool rather than an absolute measure of security.

A Disciplined Approach to Credit Investing

Mr. Athreya reiterated that their investment philosophy at Sundaram Finance revolves around detailed due diligence and a strong emphasis on risk management. He pointed out that their goal is to create value within the entities they invest in while avoiding high-risk scenarios. The approach ensures that investor capital is protected while generating stable and risk-adjusted returns.

He stated that the fund is committed to evolving its strategies and developing new products that safeguard capital and deliver consistent returns. By focusing on structured deals and maintaining rigorous end-use monitoring, the fund aims to offer a reliable and high-performing investment vehicle for its stakeholders.

The Rise of Targeted Return Funds in Private Credit

Mr. Arjun Nagarajan engaged with Mr. Vatsaal to understand the evolving landscape of private credit markets. Mr. Nagarajan inquired whether the increasing demand for targeted return funds has heightened competition, placing pressure on this investment strategy.

Mr. Vatsaal acknowledged that there is indeed a growing requirement, particularly from institutional investors such as insurance companies and large corporate treasuries. These investors have mandates to allocate funds within structured, rated investment vehicles. He pointed out that currently, only two or three funds in the market hold such ratings. Their ratings, he explained, stem from the strength of sponsor contributions, track records, and the fact that these funds focus on higher-grade issuers.

He elaborated that their fund maintains a disciplined approach, ensuring that 51% to 65% of the portfolio consists of investment-grade assets, typically exceeding a Triple B+ rating. This approach is in contrast to the broader private credit market, which often delves into lower-rated investments, including unrated and unlisted Non-Convertible Debentures (NCDs). By committing to higher-quality assets, the fund creates a niche for itself, making it appealing to institutional investors and high-net-worth individuals (HNWIs) who prioritize safety while seeking better returns.

A Diversified and Cash-Generative Portfolio

Mr. Vatsaal emphasized that the fund offers a diversified and cash-generative investment avenue, providing quarterly income distributions. The objective is to create a treasury-plus product rather than an Alternative Investment Fund (AIF) with a higher risk profile. The fund provides investors—who traditionally rely on highly-rated corporate bonds—with an opportunity to earn an alpha while maintaining controlled risk exposure.

He further explained that Sundaram Finance, through its balance sheet, ensures a robust portfolio by holding substantial skin in the game. This strategy reassures investors that they can expect return characteristics similar to those achieved by investing directly in high-quality bonds but with the added benefit of diversification and professional fund management.

The fund targets two key investor segments: HNWIs at the retail level, who are seeking the right product to enter the AIF space with consistent income generation, and institutional investors requiring rated funds for substantial capital deployment. Mr. Vatsaal confirmed that these twin objectives form the foundation of their investment strategy.

Differentiating Credit Investment from Equity Investment

Shifting the conversation, Mr. Nagarajan sought clarity on the parallels between credit investments and equity market classifications. He questioned whether performing credit, large-cap corporate credit, and real estate investments could be categorized similarly to large-cap, mid-cap, and small-cap equities.

Mr. Vatsaal responded that while the classification framework works in equity markets, it does not directly apply to credit investments. He explained that in credit markets, company size—defined by revenue or EBITDA—is not the primary determinant of credit quality. Instead, debt serviceability plays a crucial role in obtaining a strong credit rating. Key parameters such as debt-to-EBITDA, debt-to-equity, and the debt service coverage ratio (DSCR) significantly influence an entity’s ability to raise funds and determine the pricing at which it can do so.

Industry factors, the stage of business evolution, and product differentiation also impact credit ratings. Unlike equity investments, where size often correlates with stability, in credit markets, a smaller company with strong cash flows and responsible debt management can secure a higher credit rating than a larger, highly leveraged entity.

Credit Strategy and Risk Management: A Comparative Perspective

Mr. Nagarajan then directed the discussion toward risk assessment in different credit investment strategies. He noted that Mr. Vatsaal had previously worked with ARA, a corporate credit NBFC under the conservative Kosar Group, where he had dealt with loans to Double A and Single A-rated issuers. Seeking further insights, he asked how the risks assessed in ARA’s strategy compared with those of Sundaram Alternates’ Peak Performers Fund.

In response, Mr. Vatsaal highlighted that the key synergy between both institutions lay in their emphasis on backing the right promoters. He noted that for funds such as Sundaram Alternates and ARA, promoter quality is a decisive factor in underwriting transactions. While credit ratings serve as an essential benchmark, numerous additional factors, such as financial stability, operational track record, and industry standing, must be considered before extending credit.

He explained that investment-grade ratings form a baseline criterion for consideration, with anything below investment grade requiring extensive due diligence. He further elaborated that while some funds may explore lower-rated investments, the ability of a company to generate consistent cash flows is paramount. Both ARA and Sundaram Alternates focus on borrowers with strong cash flows, minimizing refinancing risks and ensuring timely repayments without dependence on unpredictable events.

Audience Questions

Strategic Credit Risk Management: Insights from Mr. Karthik Athreya

Ms. Akshara Menon engaged with Mr. Karthik Athreya on the intricacies of credit risk management, portfolio structuring, and the principles underpinning their investment strategy. The conversation provided valuable perspectives on how funds navigate risk exposure and ensure capital protection.

Managing Overexposure in Repeat Business

Ms. Menon sought clarity on how Mr. Athreya's firm manages repeat business while preventing overexposure to a single borrower, particularly in stressed credit cycles. He explained that each fund adheres to a strict credit policy, which includes considerations at multiple levels such as deal, sector, counterparty, and commodity risk. A fundamental aspect of their strategy involves capping single-borrower exposure at 10–12% of the fund. This approach ensures that, at any given time, the firm maintains a portfolio of 10 to 14 transactions, striking an optimal balance between granularity and efficient monitoring.

He elaborated on the rationale behind this strategy, stating that an overly fragmented portfolio could diminish impact on the capital structure and compromise returns, whereas excessive concentration could lead to higher risks. Their methodology ensures that, even in a worst-case scenario where one out of ten deals results in a total loss, the overall portfolio remains intact. This disciplined approach to diversification mitigates downside risk while sustaining attractive returns.

Mitigating Refinancing Risk in Market Downturns

Ms. Menon then inquired about how the fund’s modernisation structure helps reduce risk, particularly when refinancing options shrink during market downturns. Mr. Athreya emphasised that capital protection remains their foremost priority, as reflected in their credit policy. They avoid lending to businesses susceptible to sudden liquidity crises by focusing on entities with stable, long-standing operations and highly visible cash flows.

Using real estate as an example, he addressed concerns regarding its unregulated nature. He highlighted that their credit underwriting approach is unique, involving a strict focus on brownfield projects rather than greenfield developments. Their firm exclusively engages with projects that have received regulatory approvals, achieved 30–50% sales, and completed at least 20–30% construction. This mitigates risks associated with regulatory delays, political interference, and early-stage uncertainties.

Furthermore, their strategy ensures that no single project operates in isolation. Instead, every deal encompasses at least two projects at different execution stages, enabling cash flows from one project to support the other when needed. This structure significantly reduces exposure to single-project risks and enhances financial stability.

Ensuring Capital Protection and Refinancing Viability

Ms. Menon raised a crucial point about liquidity bias in situations where a borrower’s payment schedule is disrupted. Mr. Athreya reiterated that their credit policy is designed to prevent such vulnerabilities. He noted that their lending model avoids sudden-death scenarios, venture-stage risks, and market-driven uncertainties. The goal is always to ensure repayment through the business’s own cash flows rather than relying on external liquidity events such as IPOs or asset sales.

Addressing potential delays, he explained that their firm maintains substantial equity buffers, strong asset backing, and refinancing capability. Their loan-to-value (LTV) ratio typically stands at 30–50%, whereas many competitors operate at 70–80% LTV. This conservative approach ensures that even in adverse situations, other financial institutions find value in refinancing their loans, making their exit strategy seamless.

Balancing Refinancing and Credit Risk

A critical aspect of their investment philosophy, as outlined by Mr. Athreya, is to prefer refinancing or reinvestment risks over credit risks. The fund's goal is to ensure that promoters actively seek to retire their debt rather than holding on to it long-term. If a borrower is eager to refinance at a lower rate, it signals a successful deal. Conversely, if a borrower prefers to retain their debt indefinitely, it may indicate an overly generous financing arrangement.

Early Exits and Strategic Withdrawals

Ms. Menon further questioned whether the fund had encountered situations requiring an early exit. Mr. Athreya acknowledged that while the vast majority of their deals performed as expected, there had been instances where an early exit was warranted. In such cases, capital was recovered efficiently due to their strong underwriting standards and risk-mitigation strategies.

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