PMS Bazaar recently organized a webinar titled “Where Performing Credit fits in your portfolio,” which featured Mr. Vaibhav Porwal, Co-Founder Dezerv and Mr. Sahil Contractor, Co-Founder, Dezerv. This blog covers the important points shared in this insightful webinar.

The webinar blog covers insights from Mr. Vaibhav Porwal and Mr. Sahil Contractor, which includes  the growing role of performing credit in investment portfolios. They explain why profitable businesses use private credit, how fund managers assess risks, and the benefits of a fund-of-funds structure. It also covers return expectations, taxation, diversification, governance practices, liquidity considerations, and the strategies used to deliver stable, income-focused returns.

Key aspects covered in this webinar blog are

• Introduction to performing credit and its growing appeal 
• Understanding the performing credit ecosystem 
• Why investors are allocating to performing credit 
• The borrower’s perspective: Why companies seek private credit 
• Key advantages of performing credit over traditional bank lending 
• Strategy and diversification in performing credit investing 
• Why a fund-of-funds approach can reduce risk 
• The Five S framework for fund selection 
• Tax treatment and return structure 
• Governance and risk management practices 
• Addressing concerns around private credit defaults 
• The rationale behind choosing a fund-of-funds structure 
• Transparency and fee considerations 
• Exit strategies for borrowers 
• Liquidity considerations and investment horizon 
• Concluding thoughts on performing credit as a portfolio allocation tool 

Summary: Performing credit is gaining popularity among investors seeking higher and more predictable returns than traditional bonds. It focuses on lending to profitable, cash-flow-positive companies backed by strong collateral. Borrowers prefer private credit due to regulatory restrictions on banks, faster execution, and flexible loan structures. To reduce concentration risk, experts recommend a fund-of-funds approach that diversifies investments across multiple managers and underlying companies. A rigorous “Five S” framework guides fund selection, emphasizing governance, sourcing, structuring, security, and costs. Target returns range from 14–16%, while investors are compensated for accepting limited liquidity.

Mr. Sahil started the session by noting that performing credit, frequently referred to as private credit, has emerged as a substantial component of many investors' strategies. This shift is primarily driven by a desire for enhanced returns in an environment characterized by elevated interest rates. Investors are actively seeking a "second engine" for their debt portfolios, moving beyond traditional bonds, which can be susceptible to mark-to-market fluctuations, particularly in the case of long-term instruments.

According to Mr. Sahil, the appeal of this asset class lies in the desire for clearer return projections. Investors have demonstrated a willingness to commit capital for longer tenures, provided they receive higher interest rates and possess a deep understanding of the specific performing credit segments they are accessing. While conducting thorough due diligence—identifying viable companies, sectors, and high-quality instruments—was historically a challenging endeavor, the proliferation of specialized funds in India has made this process significantly more accessible.

Understanding the Performing Credit Ecosystem

Mr. Sahil highlighted that the current market discourse focuses on defining the existence of performing credit as a category, identifying the borrowers and lenders involved, assessing potential returns, and analyzing the inherent security mechanisms. This includes both individual asset security and broader rate security, addressing how fluctuations in interest rates impact portfolios from a long-term perspective.

In the broader context of asset allocation, public markets offer access to stocks, bonds, mutual funds, and ETFs. While real estate and gold remain popular physical assets, Alternative Investment Funds (AIFs) have gained prominence. Mr. Sahil noted that while AIFs typically carry a minimum ticket size of one crore, achieving "accredited investor" status reduces this requirement to twenty-five lakhs, a strategic advantage he strongly recommends investors explore.

Distinguishing between segments is crucial. Mr. Sahil clarified that the current discussion excludes venture debt—which targets early-stage, often non-profitable companies reliant on constant capital infusion—and special situations, which involve distressed companies requiring turnaround capital. Instead, the focus remains on established, cash-flow-positive businesses backed by substantial collateral.

The Borrower’s Perspective: Why Seek Private Credit?

Mr. Vaibhav, explained the mechanics behind why profitable, cash-rich companies choose to borrow through performing credit channels rather than traditional banks. He outlined three primary drivers:

1. Regulatory Constraints: The Reserve Bank of India (RBI) restricts banks from lending for specific purposes, such as acquisition financing, lending against promoter shares, or funding the equity portion of a new project.
2. Execution Speed: While traditional bank loan cycles often span four to six months, performing credit funds can execute transactions within four to six weeks, providing management with the agility required for rapid decision-making.
3. Tailored Structuring: Banks are often limited in their ability to offer flexible payment structures. Private credit allows for arrangements like moratoriums or interest payments deferred until maturity, which align more closely with specific business needs.
   

Mr. Vaibhav emphasized that these companies view performing credit as a short-term bridge—typically 24 to 36 months—until the transaction becomes eligible for conventional bank financing. For the fund, this represents a win-win scenario: capturing a premium interest rate while maintaining high collateralization levels. He acknowledged, however, that the primary risk associated with this asset class is illiquidity, which is precisely the factor that commands the return premium.

Strategy and Diversification

Addressing the selection process, Mr. Vaibhav noted that the spectrum ranges from mid-market entities to large, AAA-rated conglomerates. The common thread is a long-standing operating history and positive EBITDA. He confirmed that these lendings are rigorously backed by hard collateral, with security coverage typically ranging from 1.5 to 4 times the loan amount.

Regarding entry strategies, Mr. Vaibhav cautioned against direct investment in individual transactions, which he deemed the most concentrated and risky approach. He argued that the most reliable deals are typically captured by institutional funds rather than individual investors. Furthermore, he highlighted the limitations of investing in a single fund—namely exposure concentration and potential fee inefficiencies.

To address these challenges, Mr. Sahil and Mr. Vaibhav proposed a "fund of funds" structure. Mr. Vaibhav argued that in fixed income, over-diversification is a prudent strategy because returns are predefined and security risk is mitigated through scale. By pooling capital, they can access the lowest fee slabs, conduct deeper due diligence, and provide investors with exposure to 50 to 65 underlying instruments across four or five high-quality funds.

Diligence and Fund Selection

Mr. Vaibhav outlined the "Five S" framework used to filter potential funds:

• Sponsor: Assessing track record, governance, and the team's "skin in the game."
• Sourcing: Preferring funds with the internal ability to originate their own deals rather than relying on secondary markets.
• Structuring: Prioritizing institutions capable of managing large-scale, complex lending transactions.
• Security: Maintaining a strict adherence to secured transactions.
• Sustainability of Expenses: Ensuring that the fee structure remains fair to the underlying investors.
  

Concluding the discussion, Mr. Sahil explained that their current approach involves deploying a substantial portion of the commitment upfront to lock in elevated yields, with the remainder drawn down periodically. This structure, combined with quarterly coupon payouts, helps bring the average life of the capital down to approximately three to three and a half years, offering a compelling blend of security, yield, and periodic liquidity for investors navigating the complexities of the Indian credit market.

As the discussion turned toward the practicalities of investing, Mr. Sahil Contractor and Mr. Vaibhav Porwal addressed the technical components of returns and the structural integrity of their investment solutions. The conversation focused on how investors receive their capital back and the mechanisms in place to safeguard those interests.

Tax Treatment and Return Structure

Mr. Vaibhav explained that all returns from the fund are taxed at the marginal rate applicable to the individual investor. The returns themselves are generated through a combination of two components: periodic interest payments, which are disbursed on a quarterly basis, and a redemption premium received at the maturity of the underlying instruments. Together, this mechanism targets an annual return of 14% to 16% for the fund, which is then passed on to the investors after accounting for management expenses.

Mr. Sahil reinforced the strategic advantage of their "fund of funds" approach. By diversifying across 50 individual companies and four to six different fund managers, they ensure that the impact of any single delinquency would be negligible—estimated at approximately 30 basis points. While they reported zero instances of default or delay in their previous funds, they emphasized that their risk management framework is designed to keep any potential yield impact minimal.

Governance, Risk Management, and the "Five S" Framework

A critical portion of the dialogue centered on risk management if a fund manager or governance structure were to change mid-cycle. Mr. Vaibhav emphasized that they only partner with institutions that possess well-defined, stable processes and a long-standing track record. He noted that these funds are not dependent on the decisions of a single individual; rather, they rely on institutional oversight, robust underwriting systems, and systemic checks and balances.

Mr. Sahil added that the team at Deserve monitors these investments like a hawk, conducting quarterly—and sometimes more frequent—check-ins with external stakeholders. Regarding the "Five S" selection framework previously discussed, Mr. Porwal shared a specific example of why a fund might be rejected: they had encountered a situation where a fund transferred securities between their own NBFC and the fund, which was immediately identified as a red flag, leading to the fund’s exclusion from their universe.

Addressing Market Concerns

When asked about recent reports regarding headwinds in private credit—specifically defaults by SaaS companies due to artificial intelligence adoption—Mr. Vaibhav clarified that these concerns are largely confined to US-based private credit funds that aggressively underwrite future subscription revenue. In the Indian context, performing credit operates differently. Lending is primarily secured against "brick-and-mortar" assets and tangible cash flows, rather than speculative future projections, providing a higher degree of safety.

The Rationale for a Fund of Funds

Addressing why they opted for a fund of funds structure rather than launching their own private credit fund, Mr. Sahil explained that their priority is to do what is best for the investor. They believe the market already contains significant intelligence, and their value lies in curating the best of these existing experts. By over-diversifying, they provide investors with institutional-grade access and superior risk-adjusted outcomes that a single, concentrated fund could not replicate.

Transparency and Fee Structures

The issue of "hidden costs" in a fund of funds was addressed directly. Mr. Porwal stated that the all-in cost for the fund would typically not exceed 2%. They prioritize fair fee structures and avoid funds that impose excessive performance fees. Mr. Contractor highlighted the contrast between their approach and the traditional "2/20" fee model. By committing over 50 crores to each fund category, they secure institutional share classes, ensuring that the gap between the gross returns generated and the net returns in the investor's hand is kept to an absolute minimum.

Exit Strategies and Liquidity

Regarding how borrowers exit these arrangements, Mr. Vaibhav outlined three primary pathways: internal accruals from successful business operations, refinancing through traditional bank loans once the company meets bank eligibility criteria, and IPO proceeds.

He reiterated that performing credit is a "hold-to-maturity" strategy. Investors are essentially being rewarded for their willingness to accept a degree of illiquidity. However, the structure does provide interim liquidity through quarterly coupon distributions. While secondary trades are technically possible if a buyer is found, the founders encouraged investors to approach this asset class with a long-term mindset, noting that the premium returns are, in essence, a compensation for the duration of the commitment.

Concluding the session, the speakers expressed their commitment to transparency, noting that they maintain their own "skin in the game" by investing personal capital alongside their clients. Through rigorous ongoing due diligence and a commitment to over-diversification, they aim to provide a stable, income-generating cornerstone for investor portfolios in an evolving Indian market.

Mr. Vaibhav and Mr. Sahil covered all the topics mentioned above in-depth and answered questions from the audience toward the end of the session. For more such insights on this webinar, watch the recording of this insightful session through the appended link below.

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Disclaimer: The content shared in this blog is for informational and educational purposes only and should not be construed as an offer, solicitation, or recommendation to invest in any Alternative Investment Fund (AIF). As per SEBI regulations, AIF investments are allowed only for investors with a minimum commitment of ₹1 crore. Prospective investors are strongly advised to carefully review the Private Placement Memorandum (PPM), including all associated risk factors, and seek independent financial advice before making any investment decision. PMS Bazaar neither endorses nor recommends any specific fund or product mentioned herein and is not responsible for any investment decisions made based on this content.