How Private Credit AIFs Are Fueling Business Growth in India

Introduction

India’s growth story is fueled by millions of SMEs and mid-market companies, which contribute nearly 30% of GDP and 45% of exports. Yet, these firms often face a financing roadblock. Banks and NBFCs tend to focus on top-rated borrowers, leaving smaller businesses struggling for access to capital.

This is where Private Credit Alternative Investment Funds (AIFs) step in. These funds, regulated under SEBI’s Category II framework, provide structured debt and mezzanine financing—tailored solutions that traditional banks avoid. Over the past five years, private credit AIFs have delivered double-digit returns to investors and life-saving capital to businesses.

As India aims to become a $5 trillion economy by 2027–28, private credit AIFs are poised to play a defining role in enabling business growth, job creation, and economic resilience.

For a deeper understanding of AIF structures, see our detailed guide: Decoding AIFs in India: 5 Strategies for Private Market Wealth Building.

What Are Private Credit AIFs?

Private Credit AIFs are pooled investment vehicles that provide debt financing to businesses outside traditional banking channels.

To explore general AIF structures, visit our AIF page.

Key Features:

• Category II AIFs: These focus on debt, structured credit, and mezzanine financing.
• Non-dilutive financing: Companies raise growth capital without losing equity ownership.
• Flexibility: Funds can structure repayments with bullet maturities, equity kickers, or performance-linked terms.
• Investor profile: Primarily High Net Worth Individuals (HNIs), family offices, corporate treasuries, and institutional investors.

By bridging the gap between bank loans and equity financing, private credit AIFs provide customized solutions for businesses while generating steady, higher-yield returns for investors.

Past Performance of Private Credit AIFs in India

1. Return Track Record

• Performing Credit Funds: Delivered 12–16% net IRRs over the past few years—significantly higher than corporate bonds (~7–9%) or fixed deposits (~5–6%).
• Special Situation & Distressed Credit Funds: In select cases, yielded 18–20% IRRs, though these carry higher risk.
• Coupon-linked funds: Offered predictable monthly/quarterly payouts (8–12%) plus upside potential.

2. Deal Growth

• 2022: 77 private credit deals.
• 2023: 108 deals, totaling ~$6 billion.
• 2024: Deal value nearly doubled to $10 billion, marking private credit’s strongest year yet.

3. AMC Track Records

• Vivriti AMC: Delivered one of the best-performing Emerging Corporate Bond Funds, enabling working capital and expansion loans for mid-sized corporates.
• Nippon India Credit Opportunities Fund: Structured diversified exposure across 8–12 issuers, targeting stable 14% IRR.
• Sundaram Alternates’ PCOF-I: Backed multiple South India-based mid-market companies with secured debt, protecting investors via asset cover.
• Neo AMC: Its Income Opportunities Fund attracted strong HNI participation with steady monthly payouts.

4. Investor Sentiment

Past performance has attracted a wider investor base—from HNIs and family offices to corporate treasuries, insurance companies, and even global institutional investors. Confidence has grown because default rates have been contained and most funds emphasize collateral-backed lending.

Leading AMCs in Private Credit AIFs

Vivriti Asset Management

• Among the first to specialize in mid-market credit.
• Focuses on SMEs and corporates with revenues between ₹250–5,000 crore.
• Funds structured around secured bonds and mezzanine instruments.
• Built reputation for consistent double-digit returns.

Nippon India AIF Management

• Nippon India Credit Opportunities AIF Scheme 1:
  • Category II, close-ended, 5.5 years.
  • IRR target: 12–16%.
  • Diversified across listed/unlisted debentures of mid-market corporates.
• Manages 18 AIFs across credit, real estate, venture, and equity, showcasing scale and expertise.

Neo Asset Management

• Neo Income Opportunities Fund:
  • Crisil AA- rated, 4-year tenor.
  • 1% monthly coupon; gross IRR 15–16%, net investor return ~12%.
• Designed for investors seeking steady cash flows alongside credit exposure.

Sundaram Alternates

• Performing Credit Opportunities Fund – Series I (PCOF-I): Targets mid-market corporates with structured secured lending.
• Emerging Corporate Credit Opportunities Fund I: Focuses on MSMEs, fintech, manufacturing, and services.
• Strong regional presence in South India, expanding nationwide.

Kotak Mahindra AMC (Recent Entry)

• Launched Kotak Credit Opportunities Fund in May 2025.
• First close raised ₹1,200 crore, with a hard cap of ₹2,000 crore.
• Kotak committed 20% sponsor capital, aligning interests with investors.
• Focuses on performing credit opportunities.

Aditya Birla Sun Life AMC (Recent Entry)

• Entered private credit in October 2024.
• Launched ₹2,500 crore performing credit fund.
• Sponsor invested 10% capital for strong alignment.
• Targets India’s $100 billion performing credit opportunity with structured debt.

How Private Credit AIFs Help Businesses Grow

1. Filling the Credit Gap

• Banks prefer highly-rated corporates; SMEs often excluded.
• Funds lend to SMEs excluded by banks, fueling expansion (IVCA).
• Private credit AIFs finance unrated or lower-rated companies with viable growth prospects.

2. Flexible Structures

• Bullet repayments, equity kickers, event-linked payouts.
• Align debt obligations with company cash flows.

3. Speed & Customization

• Funds deploy capital faster than banks.
• Terms are custom-built for acquisitions, expansion, or rescue financing.

4. Non-Dilutive Capital

• Businesses don’t sacrifice promoter equity.
• Maintains ownership while unlocking growth funding.

Benefits for Investors

• Attractive returns: 12–16% IRRs, with potential upside.
• Diversification: Access to private companies and industries not available in public markets.
• Predictable payouts: Many funds provide regular coupons.
• Inflation hedge: Higher yields compared to traditional fixed income.

Future Outlook: Private Credit AIFs in India

1. Market Growth

• Expected to reach $150 billion by 2025 and $250 billion by 2030.
• Driven by SME growth, NBFC limitations, and rising institutional interest.

2. Sector Focus

• Renewable energy, healthcare, fintech, infrastructure, and consumer services will be key beneficiaries.

3. Regulatory Evolution

• SEBI strengthening governance and reporting.
• RBI’s 2025 securitization rule to deepen liquidity for stressed credit.

4. Institutional Participation

• Insurance, pension funds, and sovereign wealth funds likely to increase allocations.

5. Competition & Innovation

• More AMCs will launch AIFs with specialized strategies—performing credit, distressed assets, mezzanine financing, and sector-specific credit.

Risks & Considerations

• Credit risk: Exposure to mid-market borrowers.
• Liquidity risk: Closed-end structures with 4–6 year lock-ins.
• Transparency challenges: Less regulated compared to public debt.
• Due diligence required: Investors must evaluate AMC track records.

FAQs

Q1: What are Private Credit AIFs in India?
Private Credit AIFs are Category II Alternative Investment Funds that provide debt financing to companies outside traditional banking channels.

Q2: Are Private Credit AIFs safe?
They carry higher credit risk than bank deposits but mitigate this with collateral, structured deals, and asset cover.

Q3: What returns can investors expect?
Performing credit funds typically target 12–16% IRRs, while special situation funds may yield higher.

Q4: Who can invest in Private Credit AIFs?
Primarily HNIs, family offices, institutions, and corporate treasuries. Retail investors are usually not eligible due to high minimum ticket sizes (₹1 crore+).

Q5: How do Private Credit AIFs help businesses?
They provide flexible, non-dilutive, and customized capital to SMEs and mid-market firms, enabling growth, acquisitions, or turnaround funding.

Conclusion

Private Credit AIFs have moved from being a niche product to a mainstream financing tool in India. Their proven past performance, double-digit returns, and ability to bridge the SME funding gap make them vital for India’s growth story.

With strong players like Vivriti, Nippon, Neo, Sundaram, and recent entrants Kotak and Aditya Birla Sun Life, the ecosystem is set to expand rapidly. For businesses, they unlock growth without equity dilution; for investors, they offer attractive, inflation-beating returns.

As India advances toward becoming a global economic powerhouse, Private Credit AIFs will be at the center of business growth, innovation, and capital market evolution.