Private credit is not just about high returns, cash flow matters more

Speaking at the CafeAlt event hosted by Cafemutual, Hemant Daga, Co-Founder and CEO of Neo Asset Management and Neo Wealth and Asset Management, argued that private credit is attracting attention in India because some clients need regular income or additional sources of return beyond equities. He said the opportunity is easiest to understand by focusing on where the money comes from. "The client either wants income or growth," Daga said. The core principle, in his framing, is return on cash flows: a business generates cash, a property earns rent, a road provides annuity income, and borrowers repay loans from their earnings. "If cash flows are not there, there is a problem," he said.

Daga grouped the opportunity into three areas. Corporate credit involves lending to businesses already generating cash flow, which can range from performing credit to higher-yielding deals. Consumption-linked credit includes securitised pools of loans to several MSMEs, allowing investors to share in repayment cash flows across a broader borrower base rather than a single exposure. Infrastructure and hard assets, including roads, transmission lines and commercial properties, can generate regular annuity or rental income. He noted that REITs and InvITs have already made some of these assets accessible to a wider investor base.

Daga put annual private credit demand in India at around Rs. 2 lakh crore, comparing it with the size of the country's IPO market. He said banks cannot meet every financing need, citing acquisition financing, promoter financing and last-mile funding, as well as borrowers who need customised repayment structures such as a moratorium before repayments begin. "Banks are slow sometimes. Everything banks cannot do, that's why we exist," he said. He cautioned that this structuring flexibility also makes understanding the borrower and deal structure essential.

For distributors, Daga said a higher return should not be the starting point. "Returns are not the only holy grail of evaluation. I think that's super misleading," he said. His first test is whether the underlying borrower or asset generates enough cash flow, with particular emphasis on regular coupons. His second is diversification: because one or two stressed exposures can significantly affect a concentrated credit portfolio, he said portfolios should be spread across a large number of deals. His third concerns the fund manager, including experience, track record, size, stability, whether the team has worked together previously, and how much commitment the manager has to the business.