Kotak Mahindra Asset Management Company (AMC) is set to enter the rapidly expanding Alternative Investment Fund (AIF) space by launching a private credit fund in December 2024. This move marks a significant step in the diversification of Kotak AMC’s investment offerings, as the company aims to tap into the growing demand for alternative debt financing in India.

The private credit fund, which will target a total fund size of US$ 236 million (Rs. 2,000 crore), will primarily focus on providing debt funding to unlisted companies. The fund will support businesses seeking capital for acquisition financing and capital expansion, offering them more flexible options compared to traditional bank loans. These funds will be used to fuel the growth of unlisted firms, particularly in industries with significant potential for expansion.

Strategic Focus and Contributions

Mr. Deepak Agrawal, the Chief Investment Officer (CIO) of Fixed Income at Kotak AMC, confirmed that the company would contribute 20% of the total fund size. This demonstrates Kotak AMC’s commitment and confidence in the private credit space. The fund is expected to be fully raised within its first year, and the company plans to deploy the raised capital quickly to meet the funding needs of businesses seeking debt financing.

The private credit fund model provides alternative financing solutions to companies, especially those with lower credit ratings or limited access to traditional bank financing. The flexibility of private credit is one of its key selling points, as these funds often offer more tailored repayment terms compared to the rigid structures associated with traditional bank loans. This flexibility is becoming increasingly attractive to businesses that need customized financial solutions to support growth.

Rising Demand for Private Credit in India

The launch of Kotak’s private credit fund comes as investor interest in private credit continues to grow in India. The sector is attracting significant attention from ultra-high-net-worth individuals (UHNIs) and Indian family offices, especially in Tier-II cities. A report by Praxis and the Indian Venture and Alternate Capital Association (IVCA) has forecasted that the private credit assets under management (AUM) in India will likely reach US$ 60-70 billion (Rs. 5,08,380-5,93,110 crore) by FY28, a clear indication of the rising demand for these investment products.

The surge in private credit investments is driven by the growing need for flexible financing solutions, particularly as traditional bank credit remains constrained for certain businesses. In H1 FY23, private credit funds in India deployed over US$ 5.1 billion (Rs. 43,212 crore), with the average deal size rising from US$ 33 million (Rs. 280 crore) in FY22 to US$ 80 million (Rs. 678 crore). This highlights the increasing scale of transactions in the sector, further underlining the growing importance of private credit in India's financial ecosystem.

Targeted Return and Fund Strategy

Kotak AMC's private credit fund aims for a target return of 13% to 16%, making it an attractive proposition for investors looking to generate higher yields compared to traditional fixed-income instruments. The fund will focus on a select group of unlisted companies, providing debt financing for expansion or acquisition needs. The flexibility in structuring the deals will enable Kotak AMC to serve a variety of businesses, helping them meet their capital requirements while generating attractive returns for its investors.

Market Outlook and Competitiveness

Despite the increasing number of players in the private credit space, Kotak AMC’s CIO of Private Credit, Mr. Saurabh Tripathi, expressed confidence in the opportunities available, highlighting that their entry into the market is not hindered by the presence of several other fund houses. Kotak AMC believes that its established reputation and expertise in managing fixed-income products give it a strong competitive edge in securing deals and delivering value to its investors.

Conclusion

The launch of Kotak Mahindra AMC’s private credit fund reflects a growing shift in the Indian investment landscape toward alternative financing solutions. With US$ 236 million targeted for the first phase and a return expectation of 13-16%, the fund is well-positioned to capitalize on the demand for flexible financing options in the country. As private credit continues to gain traction, especially among UHNIs and family offices, Kotak AMC’s entry into this space could play a significant role in meeting the capital needs of unlisted companies while offering attractive investment returns.

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