There's a huge opportunity for performing credit funds: VAM's Sukumar

On the debt side, mutual funds eye returns of 8 per cent while real estate and special situation funds eye 16 per cent plus returns. As a result, the space for 8 to 16 per cent returns is wide open, says Vineet Sukumar, founder & managing director, Vivriti Asset Management (VAM). an AIF offering performing credit funds. In an interview with Sundar Sethuraman, Sukumar explains why investment opportunities in this space are expected to grow manifold. Edited excerpts:  

What have been the key trends in the private credit markets?

Globally, private credit accounts for 10-15 per cent of the assets under management (AUM) under private capital. In India, the opportunities for private credit emanate from structural issues in the debt market. Following the global financial crisis, the banking sector became increasingly risk averse towards the mid-corporate space while asset managers sharply cut down their allocations to the segment from 2018-19, following several debt crises. Also, non-bank lenders in corporate lending largely migrated to retail/MSME credit, after facing a liquidity crunch in 2018. The decline in participation in wholesale loans to the mid-corporate segment has largely been met by alternate investment funds (AIFs) and other forms of FPI vehicles like InvITs, REITs. Also, asymmetry in the credit market and mispricing of risks are causing much lower share of lending to companies rated A/below compared to the same in the AA/AAA rated universe. These caused a massive gap and significant opportunities for private credit providers to grow.

What are the key challenges for private credit funds? How macro factors impacted funding needs for companies?

Like other segments, private credit is not fully immune to macroeconomic headwinds. Nevertheless, it continues to gain scale amid the volatile markets led by the liquidity surge post-pandemic and the increasing need for yield amongst institutional and private wealth investors. It has exhibited remarkably low volatility compared to other asset classes. Finally, the need for debt funding amongst mid-market enterprises -- lacking access to banks or the bond markets -- remains high and a strong growth driver.

How are private credit-focused AIFs growing and who are the key investors?

As of now, private credit-focused AIFs comprise a minuscule portion of the industry (at less than 15 per cent). However, the sector has been evolving very fast with the number of players in the market growing about four times over the last five years. The penetration of such AIFs has also improved over the same period with the ticket size of investments by AIFs going down from Rs 100 crore to Rs 10-50 crore.

AIFs are growing due to their low correlation to public markets. Apart from financial institutions and corporates, HNIs and family offices are increasingly allocating their investible surplus to AIFs away from traditional asset classes due to volatile market conditions.

What are the key draws for private credit-focused AIFs? How have been the returns on a pre-tax basis?

Within private credit, India saw the highest attention towards real estate funds, special situation funds, venture debt funds, and distressed funds. While these funds meet the specific needs of the market, they typically seek an internal rate of return (IRR) of more than 16 per cent. This leaves a large gap in the market.

And with MFs typically lending at finer rates, the space between 8 per cent and 16 per cent is quite wide open. This space consists of cash flow-based lending to operating companies, focusing on growth, long-term working capital, capital expenditure. It is known as performing credit. Investment opportunities in this space could go up to $100 billion in the next three to five years.

Are high-interest rates a risk while investing in small/mid-sized companies? How has the asset quality been over the years?
 

In a rising interest rate environment, the yield spread between funds and market rates reduces. This turns into an opportunity for us as mid-market companies are incentivised to borrow from a non-traditional lending route like we provide to take advantage of a flexible repayment structure.

How many schemes has VAM offered and are those fully invested? How are they differentiated and why not open-ended? How do you spot investment opportunities?

VAM launched seven funds; four are closed and three are open for subscriptions. The key differentiating factors between them are yield range and risk parameters. We usually deploy our commitments within a month. Till date, we have invested 90 to 95 per cent of the total contribution and we have a healthy deal pipeline.

VAM funds usually take a call to invest for 24-42 months which is considerably long to predict market volatility. Open-ended structures work if you are taking a call for 3-6 months.

We invest only in fixed-income instruments issued by operating and profit-making companies, which have proven business models and high potential to scale but lack adequate liquidity and discovery. 

How does your AUM compare with similar schemes of other AIF players? What will be the key growth drivers for VAM?
 

VAM commenced accepting subscriptions for its first fund in February 2020 and has achieved an AUM of Rs 1,900 crore in three years since then across seven funds. This has been a phase of rapid growth, supported by high-quality institutional and private wealth investors. On the asset side, VAM made over 100 investments till date. This scale and growth is quite unprecedented amongst alternate asset managers that are not backed by a large group. Within the credit category, VAM’s investor base and issuer base stands out on diversification, granularity, and scale.