The Rise of Private Credit and Its Impact on Traditional Investment Banking

Private credit has emerged as a major force in the global capital markets. In India, the segment is gaining traction as businesses seek alternative sources of financing beyond traditional bank loans and public market debt. This shift is beginning to impact the role of investment banks, especially in how they approach capital raising and deal structuring for clients.

Private credit refers to non-bank lending, typically provided by asset managers, private debt funds, or special situation investors. These funds offer capital directly to companies, often for a fixed return, and operate outside the traditional regulatory framework that applies to banks or public debt markets.

Why private credit is growing

Several factors are driving the growth of private credit in India. First, there are rising constraints on bank lending. Regulatory capital norms, risk aversion post-NBFC crises, and tighter due diligence have made traditional loans harder to access for mid-sized or leveraged companies. Second, the bond market in India remains underdeveloped. Many companies struggle to meet credit rating criteria or lack the scale to issue listed debt.

Private credit fills this gap. It offers faster execution, customized structures, and flexible terms. Borrowers are willing to pay a premium for these advantages, especially when timing is critical or when traditional lenders are reluctant.

Investors, on the other side, are looking for yield. With interest rates fluctuating and public equity markets volatile, private credit offers relatively stable, high-return investments. Institutional investors like pension funds and insurance companies are also allocating more to this asset class, both globally and in India.

Impact on investment banking advisory

Traditional investment banks that focused heavily on public equity and syndicated loans now face a new environment. Clients are asking for advice not just on IPOs or NCDs, but also on structured private debt. As a result, advisory services are evolving.

Banks are building relationships with private debt funds and alternative capital providers. They are facilitating introductions, negotiating terms, and helping companies prepare data rooms and forecasts. In many cases, investment banks now compete directly with private credit funds that offer both capital and advisory.

Some banks have responded by launching their own private credit arms or asset management platforms. Others are partnering with foreign funds to co-origin deals and share economics.

Deal structures are becoming more complex

Unlike public debt or equity, private credit allows for more tailored structures. These include mezzanine debt, convertible instruments, payment-in-kind (PIK) interest, revenue-linked repayments, or second lien loans. The flexibility is useful, but the complexity requires deeper financial modeling and risk assessment.

Investment banks must now understand the nuances of these instruments. They need to advise promoters on the long-term implications of accepting covenant-heavy or investor-controlled debt. The focus is not only on capital access but also on future exit strategies and dilution risk.

Private credit deals often include board observation rights, information covenants, or operational restrictions. These terms are negotiated heavily, and investment banks play a key role in aligning expectations on both sides.

Influence on capital markets strategy

Private credit is also changing how companies plan their broader capital markets journey. Some firms that might have opted for a small pre-IPO round or a rights issue are now choosing private credit to avoid dilution or public scrutiny. This delays their entry into listed markets.

For investment banks, this means longer deal cycles and more diverse client demands. They must track capital flows not just in equity but across structured finance, credit opportunities, and hybrid instruments. This also opens the door to secondary dealmaking, where early investors or funds may look to exit before maturity.

The traditional model of pitching IPOs as the default solution is no longer sufficient. Banks need to provide a complete view of the capital stack and offer solutions tailored to each company's risk appetite and growth phase.

Regulatory developments and risks

India's regulatory framework is beginning to catch up. SEBI has introduced new categories for Alternative Investment Funds (AIFs) that lend to companies, and there are discussions on bringing more transparency to unlisted debt instruments. At the same time, regulators are cautious about concentration risk, misuse of structured products, and lack of oversight in the private credit space.

Investment banks must guide clients through these developments. They need to ensure that deal structures comply with current laws and that borrowers understand the risk of tighter rules in the future.

There is also reputational risk. If a private credit deal fails, the promoter, investor, and advisor all face scrutiny. This requires strong due diligence and realistic cash flow projections, especially in deals involving turnarounds or stressed assets.

Private credit is reshaping the financing landscape in India. It offers speed, customization, and access that traditional routes often cannot match. But it also brings complexity, new risks, and regulatory uncertainty.

For investment banks, the rise of private credit is both a challenge and an opportunity. It demands a broader skill set, deeper relationships with capital providers, and a more flexible approach to structuring deals. Those that adapt will continue to stay relevant in a changing financial environment.

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