Private Credit Funds: The Quiet Boom in Indian HNI Portfolios

Public-market debt yields have compressed sharply over the past four quarters even as corporate cash-flows stabilise, pushing wealth managers to look beyond listed papers. Cat II AIFs structured around private credit are the most visible beneficiary of this rotation.

For a typical HNI portfolio, the allocation has moved from sub-3% in FY24 to closer to 8% today, driven by both yield and tenure-matched cashflows.

The headline IRR — usually 12-15% gross — looks attractive, but most of the premium is compensation for two specific risks: refinancing risk on the underlying borrowers, and limited secondary liquidity. Investors who skipped the diligence on borrower concentration learned this the hard way during the 2024 NBFC stress cycle.

Most India private credit strategies sit inside a Category II AIF — a close-ended vehicle that calls capital in tranches (drawdowns) as it originates loans, rather than taking the full commitment upfront. The fund typically lends to mid-market companies, real-estate developers, or special situations that banks have stepped away from.

The loans are usually senior secured, backed by a charge over cash flows or assets, with structured repayment schedules and covenants. Tenures of three to five years are common, matched to the fund's own lock-in so the manager isn't forced to sell illiquid paper to meet redemptions.

Yield alone tells you very little. Before committing, look at the things that determine whether that yield survives contact with reality:

• Borrower concentration — how much of the portfolio sits with the top five borrowers, and in a single sector.
• Security cover — the value and enforceability of the collateral behind each loan, not just its existence on paper.
• Manager track record — how the team's earlier vintages performed through a stress cycle, and their actual recovery experience on defaults.
• Fee and hurdle structure — the management fee, the hurdle rate, and the share of upside (carry) the manager keeps.
• Exit and liquidity — the lock-in, the expected distribution schedule, and what happens if you need out early.

Private credit can be a genuine diversifier — its returns are driven by credit spreads and origination skill rather than equity-market direction, and the cash-flow profile can be matched to liabilities. But it is not a fixed-deposit substitute. The premium over listed debt is payment for illiquidity and credit risk, and it is only worth taking if the underwriting and security genuinely justify it. Size the allocation to what you can lock away for the full tenure.