Super-rich flock to an emerging investment theme as banks turn away

Private credit funds are emerging as a great investment class for the high net worth and ultra-high net worth individuals, according to Motilal Oswal Private Wealth (MOPW). This comes about amid a decline in lending to this segment by commercial banks after the Global Financial Crisis, according to MOPW, a part of financial services firm Motilal Oswal Financial Services.

What are private credit funds really?

Private credit funds are professionally managed pools of money raised to lend money to private companies. An alternative to bank lending, typically, a private credit fund enables investors with a higher risk appetite to earn returns on money loaned to businesses.

Technically, investing in private credit funds is willing to take on the risk of investing in low-rated debt securities, offering high-interest rates to earn higher returns than those offered by AAA-rated debt securities, according to Motilal Oswal Private Wealth, which believes these funds are a good risk-reward opportunity for HNIs and UHNIs.

According to Motilal Oswal Private Wealth, private credit funds generate returns to the tune of 14-16 per cent. HNIs and UHNIs are incrementally investing in private credit funds, Motilal Oswal Private Wealth said.

“It is important that the fund be managed by a fund manager with sufficient experience and expertise in this area of debt investment. He said that selecting the right credit opportunities fund is an important measure to control the level of risk," said Jayesh Faria, Associate Director at MOPW.

However, it is ideal to limit your exposure to such funds to about 10 per cent of your debt portfolio, it added.

The wealth management firm expects the private credit funds industry to grow 10 times by 2025.