Vacuum for Indian MSMEs seeking growth finance: Nishu Malhotra, ADM Capital

In India, shift to private credit, Nishu said, started before the Covid era, driven by regulatory reforms including the Insolvency and Bankruptcy code, Real Estate Regulatory Authority (RERA) Act etc.

NISHU MALHOTRA, director at ADM Capital, an Asia Pacific (APAC)-based firm that has nearly $2 billion worth of assets under management (AUM), tells Puneet Wadhwa in an email interview that  in a high interest rate scenario, the ability to differentiate between credit quality is paramount, as highly leveraged companies are subject to more uncertainties. Edited excerpts:

How has the landscape changed for companies seeking and providing private capital in the last few years? What has been the average ticket size in the post-Covid era as compared to the pre-Covid years?

In India, the shift to private credit started before the Covid era, driven by regulatory reforms including the Insolvency and Bankruptcy Code, Real Estate Regulatory Authority (RERA) Act etc. As one of the fastest growing economies in the world, India has attracted more international players, which pushed ticket sizes up.

The numbers speak for themselves. According to EY, 108 private credit deals completed in India in 2023 with an aggregate value of $7.8 billion, compared with 77 deals worth $5.3 billion in 2022, with large deals boosting the overall value.

Has life become tougher for companies in the Indian MSME space seeking capital in the last couple of years? What's the experience across Asia, and more specifically India?

With non-bank finance companies (NBFCs) significantly scaling down corporate lending and banks being more conservative, there has been a vacuum for Indian MSME companies seeking growth financing. Private capital providers identified the funding gap, which is currently estimated at over $500 billion, and capitalised on the opportunity, emerging as an alternative, and often as the primary, source of capital for these under-funded MSMEs. Borrowers appreciate private credit for its customisation and flexibility.

In terms of requirement for funds, have most companies across Asia been seeking growth capital, acquisition capital, specialty capital or distress capital? What about India?

In India, private credit is principally fuelling the strong demand for growth capital, followed by other end-uses for funds.

PE and VC exits have become common as regards new-age companies in India. Do you think this phenomenon will pick up as the overall market sentiment remains buoyant? How do you deal with excessive valuations and cash burn of new-age companies?

The exit avenues continue to diversify as the Indian market matures. Public listings are on the rise. Last year saw a record number of initial public offers (IPOs) on the Indian exchange. Secondary market sales have also emerged as a viable exit strategy for investors in recent years. This not only allows strategic buyers to purchase companies at a discount, but also enables new-age companies to enhance their growth and performance with sustained funding.

There is no clarity yet on when global central banks will cut rates. How is this likely to impact the fundraising plans of companies in Asia, and India in particular? Will fundraising via private credit also feel the heat?

As long-term investors we seek consistent returns across cycles and interest rate environments and we are not driven by interest rate fluctuations. Nonetheless, in a high interest rate scenario, the ability to differentiate between credit quality is paramount, as highly leveraged companies are subject to more uncertainties. Long-standing private credit operators with on-the-ground relationships perform better in this environment, thanks to their ability to select and structure appropriate risk-return.