Global private equity majors are looking to fund Indian businesses directly as banks take a step back.
The US-based asset manager, Carlyle Group is exploring the country through its existing global credit funds, Bloomberg reported today (May 12). Last month, Apollo Global Management appointed a head for its credit business in India, where it has its second-largest office outside the US. Oaktree Capital Management, Ares Management Corp, and Blackstone are also seeking deals.
In 2022, private credit investments accounted for about $5.3 billion across 77 transactions in India, according to E&Y. This trend is likely to remain robust over the next 1-2 years.
The share of global funds in Indian business transactions stood at 58% in value terms in this period; domestic funds invested 33%. Global-domestic joint investments covered 9%.
“The overall sentiment of the private credit investors is bullish towards the private credit market...real estate and manufacturing shall dominate deal flow,” E&Y said in a February report.
“India is very interesting because...it is one of the most sophisticated markets in the world for deal structuring, but the credit products are plain vanilla,” Matthew Michelini, head of Asia-Pacific region at Apollo Global Management told Bloomberg.
The E&Y report forecasts short-term financing by businesses before listing on bourses will drive private credit demand in India in the coming months. Such funds, formally known as bridge financing, cover a company’s short-term costs until it secures a long-term financing option.
Why have banks pulled back from direct lending?
The US turmoil sparked by Signature Bank and SVB’s collapse has compelled global lenders to pull out of business deals.
Aggressive rate hikes there have also shrunk the money pools of smaller and mid-sized banks as people withdrew deposits. This has made it difficult for households and businesses to access credit.
India, too, has been raising policy rates since May 2022. Typically, in case of a rate hike, banks raise their interest rates on loans almost immediately. But, they are slow to do that with deposits.
However, when competition increases, they raise interest rates on fresh deposits depending on lending rates. This would, in turn, hurt their profitability.