PMS Bazaar conducted an Exclusive Interview with Mr. Karthick Athreya, Director of Sundaram Alternates. This Interview is a Part of our Special Interview series, which offers valuable insights from leading industry experts. In this Blog, we have extracted some key insights from the exclusive interview for you to gain quality investment insights.

Excerpts from the interview:

Shift in Asset Allocation - Moving Away from Equity?

According to Mr. Karthick Athreya, significant events have impacted the market. In the last 12 to 13 years, there have been consistent runs on institutions such as Bear Stearns, Lehman Brothers, Credit Suisse, Deutsche Bank, and Silicon Valley Bank. These institutions were once highly respected and regarded as secure, reflecting how rapidly market events affect global business and asset prices.

The frequency and severity of these events have increased in recent years, leading to new products, product classifications, risk thresholds, and other nuances that have played a role in asset allocation. This shift in asset allocation has impacted large institutions like pensions and sovereigns and retail HNI investors, who are now asking the right questions about volatility, risk tolerance, and risk-adjusted returns. Investment managers need to be able to protect their clients' capital and generate appropriate returns, given the increased frequency and severity of market events. As a result, it is essential to stay informed about macroeconomic trends and their impact on the market when considering asset allocation.

Private credit is a recently emerged asset class that has become highly advanced in assessing risk and investment mandates. As a result, it has secured a permanent place in asset allocations for many investors. The Indian economy offers a different investment opportunity due to its growth potential, which means that most bets on this market revolve around growth equity in some form. Investors can leverage the country's growth to offset local risks while factoring in the unpredictability and volatility of the global market.

However, timing is of consequence, and investors can lose money mostly in a developing or emerging market on timing. India is not immune to global uncertainty and events like geopolitical crises. The impact of currency fluctuations and global capital allocation can lead to asset bubbles. However, investors in India have a wide range of choices, and investment managers have the flexibility to structure products that cater to investors' risk-reward preferences and investment ideology. Despite regulatory changes and market crises that have affected liquidity, credit funds have consistently generated profits and cash distributions.

The Gap in Private Credit Popularity: India vs. Global

The global private credit market, which provides investment opportunities to industries and companies unable to access capital from traditional sources such as banks, public markets, or private equity, is currently valued at approximately 1.5 trillion US dollars and is expected to grow at a rate of 10 to 15 percent per year. In India, private credit is defined similarly, focusing on providing capital where traditional providers cannot. The historical capital providers in the market have been public markets, banks, and private equity funds, with private credit filling the gaps where these providers fall short.

The private credit market has evolved, starting from traditional money lenders and curbside lenders in the US or loan sharks in China. However, in India, the market has rapidly institutionalized with the emergence of private credit funds and non-bank finance companies. These entities have existed for the last 10-15 years and are now consolidating and focusing on specific asset classes. The market orientation has shifted towards providing capital for wholesale corporate use and stress/distressed scenarios involving large portfolios. For instance, hedge funds and private credit funds have bought distressed bonds, tier 2 debt, and big portfolios from banks like Deutsche Bank, which are bearing down on them. In contrast, a growth market like India demands capital to grow businesses, which is where funds like ours position themselves.

The global private credit market is around 1.5 trillion USD, growing at 10-15% annually. However, the size of the Indian market is relatively small due to two factors. The first is providing capital for various corporate uses, and the second is the demand for capital for stressed/distressed scenarios. In India, private credit is an opportunity to invest where borrowers or industry companies cannot access capital from banks, private equity, or public markets. Private credit fills the gap left by the three historical capital providers, i.e., public markets, banks, and private equity funds, wherever they cannot provide capital.

Globally, the private credit market differs greatly from emerging markets like India. In India, around 80% of the credit is provided by scheduled commercial banks, with the remaining 20% provided by various sources such as NBFCs, private lenders, and private credit funds. However, the opposite is true in the US, with 80% of wholesale credit provided by private lenders. This difference in capital structure is significant, and we are seeing a push for change in emerging markets. While the private credit market in India may not need completely invert to the 80/20 ratio seen in developed markets over the next 5 to 10 years, it's evident that banks in India, which are subject to more regulations and constraints from the RBI, are likely to see a gradual increase in exposure to non-bank financial companies (NBFCs) and alternative lending options.

In the interview, Mr. Karthick Athreya discussed several other questions in detail. Watch the full interview with the link appended below -

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