In 2023, the private credit sector saw a number of domestic players raising new funds and global investors such as such Franklin Templeton looking to foray into the segment. There were big-ticket deals involving players like Shapoorji Pallonji and Vedanta. Nilesh Dhedhi, managing director & CEO of Avendus Finance, in an interview with Raghavendra Kamath, talks about the lender’s plans and outlook for the private credit segment. Edited excerpts.
You raised Rupees 1,000 crore last year for your second fund. How much of that has been invested? When are you planning to raise your next fund?
Around 50-55% of it. Generally, new funds are planned once you touch 70-75% of deployment of existing fund. So maybe in a quarter or so we hope to reach that level and will probably have a plan to go for the next one.
Do you plan to tweak your strategy given the overall macro environment and credit scenario?
I think we will continue to be in the performing credit space, while one or two deals we can do in a special situation, one or two convertibles, hybrids and maybe a few in infrastructure. But the core 70-80% of it will remain what we have been doing, which is performing credit for now.
With many players entering the segment, some say this has led to overcrowding and underpriced the risk. Do you agree?
In the first half of the last year, that is April to September, a lot of players came into the space and all of them wanted to deploy funds. Some funds were okay with slightly lower pricing than what was going on in the market. Every fund has its own way of looking at it. But pricing depends on the flexibility and the term.
What are the sectors you feel have a lot of potential to lend to?
Manufacturing is one of the sectors which earlier was not on the radar for private credit, but now it is emerging as one because of government policies and the general pick-up in manufacturing. We are seeing a lot of mid-sized companies planning to push up their capex and add new capacities. Pharma and healthcare are also very good sectors that are seeing a lot of traction post-Covid. We have done multiple deals in pharma and healthcare.
Specialty chemicals is another one, aligned to pharma in some sense, which has been doing quite well. And of course, real estate where we don’t have a play. But otherwise, real estate as a sector is doing quite well because of the underlying economy and the cash flow and the situation of the developers. Infrastructure is also picking up quite well because there you can invest big amount of money.
Was it a conscious decision to stay out of real estate?
Yes, definitely. It was a highly conscious decision. When we started in 2016, we decided from our NBFC as well as first and second fund we will not do real estate. Real estate needs different skill sets. Some firms have teams and skill sets for both real estate and infrastructure and they do it. It (real estate) is not a sector that you can just add to your normal kind of deal-making and that’s why we cautiously decided not to dabble into it. Also, the kind of promoters we target are different and everyone has a different strategy.
What is your outlook on the value and volume of deals in private credit in 2024? Do you expect them to cross last year’s levels?
They should, I think. The size of the transactions is increasing quite a lot. Last year, we had this largest transaction involving a large group, which was $1 billion-plus. Earlier, there never used to be such large transactions in private credit. Now we are seeing $100 million kind of transactions also in the private credit. So growth may not be so much in the number of deals now. If you are doing three-four deals, people will continue to do three-four deals a year. Volume increase can only happen if there are newer and newer funds coming up. I think the higher growth will be in value, because the underlying transaction size is increasing.