In an interview with ETMarkets, Dedhi said, “Alternative assets as an asset class have also been seeing high traction and gaining a high % of total allocations, which has attracted more funds for the AIF industry.” Edited quotes:
Many readers want to understand…what is a credit fund?
A structured credit fund or private credit fund may be defined as any fund that is primarily engaged in lending to non-banks or an issuer of debt or debt-like instruments to such companies.
Most of these are generally private companies and the yield on such transactions is widely available in the range of 12-18% (medium to high yield).
Private credit funds are integrated investment vehicles, usually based on the specific needs/structure/situation of borrowers, specific credit rules, guidelines, different perspectives on industry and business risk, etc. that cannot be met from traditional debt lending institutions.
Examples are promoter funding, buyout funding, capital structure equity, special situation funding, etc.
Structured credit funds may have different strategies, targeting risk-adjusted returns in a particular strategy/theme or opportunistic deals/adequate strategies.
How do you identify companies for investment?
Over the years we’ve identified sectors/types of interest/situations we’d like to look at, and based on past experiences and market/attitudes there are very obvious dos and don’ts.
Avendus Structured Credit Fund is a sector agnostic fund; However, some of the sectors where we have done a lot of deals are pharma and healthcare, IT services, specialty chemicals, manufacturing, B2B services, some sectors where we have not moved much are real estate and infrastructure.
The fund expects to build a portfolio by making and holding 10-12 investments in companies. A typical transaction fee is between 8-12% of the total fund size.
However, since we have multiple capital pools, the average transaction size will be 150-200 CRs.
Some of the factors that help us select the right asset and track its quality are deep domain knowledge across sectors within the Avendus Group, proprietary access to relationships within the group, capabilities to conduct due diligence and structure credit listings. Ability to control output.
We have a comprehensive internal and external due diligence process and write down macro factors and their impact in the short to medium term.
We have a dedicated team for risk and monitoring that closely monitors investments on an ongoing basis, with a risk management framework in place and internal processes in place.
How much AUM do you currently manage? And how does Avendus Credit Solutions intend to grow AIF AUM and maintain asset quality?
Avendus’ structured lending platform currently has an AUM of over Rs. 2000 cr. We have done 60+ deals with an aggregate value of over Rs. 5000+ cr in credit businesses.
In the future, we expect to cover the general personal loan market with multiple strategies along with large discounts.
What is Avendus’ second debt AIF and its deployment strategy target?
We are currently deploying our second fund Avendus Structured Credit Fund II which has a target size of Rs. 1000 cr. (including the green shoe option) and received a 75%+ commitment.
We have deployed 30%+ on 3 deals. The idea is to deploy on 10-12 deals in the next 1 year, following the same investment strategy we followed in the first fully-launched fund.
Why should investors consider investing in middle to high yield debt? What are the risk factors?
Personal credit has grown in popularity over the past few years as investors move to traditional debt products to offset lower debt returns in an environment characterized by higher liquidity and lower interest rates.
Alternative assets as an asset class were also seeing significant traction and gaining a high percentage of the overall allocation, attracting more liquidity to the AIF industry.
As a fixed return product, investors consider such investments as a hedge to their core fixed income portfolios, which may be exposed to interest rate and duration sensitivity.
In terms of risk factors, credit risk remains the main factor to manage continuously as this portfolio approach is not a standard balanced product to adopt.
In addition, general capital markets (private and public) movements are another reason for the exit of some deals due to liquidity events.
While the IBC framework is in place and continuously evolving, recovery in some cases may be much lower than expected due to a number of factors that should be well understood and managed in advance.
How has investment in personal loans grown in India over the past 5 years? Give us a global perspective as well.
There is significant polarity in the Indian credit market. While banks lend to companies based on certain criteria, public markets generally look at companies rated AA and above.
On the other hand, there are not many players who cater to companies whose requirements are flexible or customized.
As market cycles become not only shorter, but also more volatile, global investment managers may consider structures that allow them to respond to changing economic, market and investment environments and adapt accordingly.
In some cases, we see investment managers benefiting from having multiple products within the same investment strategy rather than sticking to a single product/specific strategy over the entire fund lifecycle.
Why are companies open to expensive debt solutions vis-a-vis raising funds through the equity line?
Given the underlying growth prospects, high-quality companies and entrepreneurs continue to seek capital in the form of customized financing solutions from alternative sources, including private equity funds.
A structured credit fund provides solutions that are not available or cannot be addressed through traditional forms of capital from banks, NBFCs, mutual funds or the equity ecosystem.
At a certain size/matrix/profitability, etc., the break even line may not be available and often advertisers may not want to reduce their share at a certain time/valuation point.
Structured debt is generally considered to be a permanent/continuous pool of capital available to any amount and borrower at any time. It allows companies to have the right capital for their needs, which does not lead to fixed capital / dilution, which will be any increase in equity.
Having said that, there are many situations that can only be accommodated/solved by equity capital. Keeping in mind the long-term strategic goal of the company/promoter is more important than choosing one type of capital that is suitable for a given situation.
What is the risk profile of investors who want to invest in credit solution funds? What is the minimum investment?
Over the last 5 years, we have seen the alternative asset segment in India maturing which has led to an increase in the number of AIFs. Commitments raised 7x from 2017-22. 6.41 tn as of March 31, 2022; Of these, CAT II AIFs account for almost 80% (Source: www.sebi.gov.in).
Investors have become more comfortable with this asset class’s higher risk-adjusted return profile by allocating more shares than their total holdings.
On average, we have seen ~5% to about 15% of the overall portfolio shift to Alternates.
In addition, with different strategies and levels of investment (venture capital, private equity, credit performance, special situations, distressed loans, real estate, venture debt, etc.), money managers have emerged that allow investors to diversify within this asset class. .
As per AIF norms, the minimum commitment for CAT II AIF is INR 1 cr.
How to manage risk in the complex structure?
Considering that every transaction is different, a very different approach must be followed for each property in order to have a multi-faceted view. Monitor the property and then constantly compare it to the overall concept.
The portfolio is constructed in a manner that seeks to optimize the balance between diversification and concentration by taking into account factors such as individual company exposure, sector balance, holding company transactions versus operating company transactions, cash flow frequency and distributions, etc.
We currently have an investment team for loan and deal structuring and a separate portfolio monitoring team that regularly monitors business performance and identifies risk and credit metrics to ensure an early warning system.
There is also a rating agency that looks at the investment and evaluates the bond independently on a regular basis.
(Disclaimer: The advice, suggestions, opinions and views given by the experts are their own. These do not represent the views of The Economic Times)