Onwards and upwards: a positive outlook for private credit in India
The global economy is facing a slowdown in growth as CY23 comes to an end. This is due to a combination of geopolitical tensions, high debt, and interest rates. The International Monetary Fund predicts a 2.9% growth rate for CY24. This is down from an average of 3.8% between 2009 and 2019. India is still one of the fastest-growing major economies, with a projected GDP growth of 7% for FY24. This is due to domestic consumption, government expenditure, and strong service exports.
In India, the overall bank credit growth for 2023 is estimated to be 23%. In the RBI’s Financial Stability Report, it is noted that banks and Non-Banking Financial Companies (NBFCs) in India are shifting their credit allocations. A growing portion of the credit is allocated to retail loans and the service sector. In H22023, we can also observe a significant increase in private real estate credit. On the other side, credit growth in large industries is slower than in other sectors. The low leverage ratios and high-interest coverage ratios on the balance sheets of corporations also reflect this. A low leverage level is also indicative of the ability of corporations to make capex investments, given their high capacity utilization rates.
In previous editions, the ‘Private Credit in India report’ stated that the wholesale books of large listed NBFCs have largely stagnated/decreased since the Infrastructure Leasing & Financial Services crisis (IL&FS). This trend continued in CY23. In the past two years, private credit funds have filled the void left by NBFCs, leaving the wholesale lending market. In December, CY23, the RBI also issued a Circular to address concerns regarding the potential ever-greening of regulated entities. The circular focused on cases where Alternative Investment Funds (AIF) substituted direct exposure to borrowers through investments in AIF units.
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Read more about growing private credit deal flow for India in 2023
According to data published by SEBI for H22023, there are at least 11 AIFs with a credit/special situations orientation, and five more are currently in the registration process. In H22023, nine funds announced fundraises totaling more than US$2b.
In 2023, the private credit deal flow in India was higher both in terms of deal value and number (CY23: 108 transactions totaling US$7.8b versus CY22 77 transactions totaling US$5.3b). The surge in deal volume was primarily due to the stabilization of interest rate in CY23. It also reflected a higher deal volume in the Real Estate sector and an increase in deal value resulting from some large deals that were executed in CY23. Please note that we have excluded venture debt, investments in financial services, term loans/WCLs disbursed to NBFCs, and offshore bond placements made by Indian corporations. For our analysis, we have also set a threshold of US$10m per private placement.
Global funds contributed 63% to the value of total deals in CY23. This is primarily because they participated in large transactions. Domestic funds led the way in terms of a number of deals. They accounted for 61%, mainly due to their focus and deal origination abilities. The real estate sector continued to be dominant, attracting US$1.7b worth of investments in CY23.
This edition also begins coverage of private credit exits in CY2023. We have compiled a list of exits totaling approximately US$2.3b based on the data we tracked. Our report includes a list of transactions that were covered by these exits.
EY Private Credit Pulse survey results in H2 2023
In the report, fund managers were surveyed. Half of the respondents believe that capital expenditure financing will drive private credit deals over the next 12-24 months. Stress-related financing is the second most important driver. This is a significant change from the last survey. Half of the fund managers ranked real estate as the sector that would see the most activity in the 12-24 months. The manufacturing sector was close behind. Real estate was also perceived to be the most risky sector of the current private credit portfolio.
The industry is more competitive than ever despite the optimism that there will be enough funds to fund private credit deals. The respondents suggest that private credit investments will total between US$5 and US$10b by CY24. According to our previous surveys, the outlook for the next two to five years is slightly more optimistic than the one to two-year horizon.
