The western financial media is currently sounding the alarm on Private Credit.

Major players like Blue Owl and KKR have seen their stock prices tumble, while Moody's has turned negative on the sector's credit outlook.

Closer to home, I see distributors in India promising investors 12–18% returns from Private Credit as if it's a "safe" alternative to an FD.

It isn't.

To understand why, you first need to understand what you're actually being paid for.

📍 Visual: People navigate a maze with two paths labeled "Distributor Lure" and "Secure Debt Portfolio", both leading toward a castle. Financial graph overlays reinforce the investing theme.

1. Not All Debt Is Created Equal

In lending, every additional risk demands additional compensation.

Private Credit offers a high premium because it combines three separate risk premiums.

Credit Premium

Lending to the Government of India is considered nearly risk-free.

Lending to a stressed company or a real estate developer carries a much higher chance of default.

Higher risk demands higher interest.

Duration Premium

The longer your money remains locked away, the more compensation you expect.

You're being paid for giving up access to your capital for an extended period.

Illiquidity Premium

This is where many investors misunderstand the product.

Unlike mutual funds or listed bonds, you cannot simply redeem your investment whenever you want.

Because your money is locked in, you receive an additional premium.

The Reality

Private Credit sits at the extreme end of all three risk premiums.

You are not just earning higher interest.

You are being compensated for accepting a meaningful possibility of losing capital altogether.

2. The Western Problem: The "Liquidity Mirage"

How did several large US Private Credit funds run into trouble?

Through a classic Asset-Liability Mismatch (ALM).

The Assets

The funds lent money to illiquid borrowers like:

• SaaS companies

• Commercial real estate projects

These loans typically take years to mature.

The Liability

To attract wealthy investors, many funds created the impression that investors could exit early.

That liquidity depended on new investors continuously replacing existing ones.

What Changed?

When AI disrupted SaaS revenues and commercial real estate weakened, investor confidence disappeared.

Everyone wanted to redeem.

Very few wanted to invest.

The liquidity promise vanished almost overnight.

Several funds effectively had to shut the exit door.

3. Is India Different?

The encouraging news is yes.

SEBI has taken a far more conservative approach.

Most Indian Private Credit investments happen through Category II AIFs, which are closed-ended vehicles.

Investors generally remain invested until the underlying loans are repaid.

Unlike many Western structures, Indian funds usually do not promise early liquidity.

That significantly reduces ALM risk.

But the Risk-Return Story Is Still Misleading

Many distributors compare:

• 18% Private Credit

• 10% Hybrid Funds

without discussing taxes or risk.

That comparison is incomplete.

Taxation

Private Credit returns are generally taxed as ordinary income, which can approach 39% for high-income investors.

The Math

A 12% pre-tax IRR becomes roughly 7.3% after tax.

The Comparison

A well-managed Debt Mutual Fund may generate approximately 6.5% post-tax, while offering:

• Higher liquidity

• Better diversification

• Significantly lower default risk

Is an additional 0.8% worth accepting the possibility of a permanent loss of capital?

As the saying goes:

In debt investing, return of capital is more important than return on capital.

Our View at Otto Money

We are not anti-Private Credit.

Some of our portfolios have exposure to it.

But it represents only a small, carefully measured allocation, primarily when equity valuations became expensive in 2024.

We aren't chasing the highest yield.

We're chasing portfolio stability.

Our Advice

If you're an HNI

Seek advice from a Registered Investment Advisor (RIA) who understands the underlying borrowers, collateral quality, and portfolio construction.

If you're not an HNI

For the debt portion of your portfolio:

• Maximise PPF and SSY first.

• Beyond those limits, a diversified Debt Mutual Fund delivering around 6.5% post-tax is often a more appropriate choice than stretching for double-digit yields.

Final Thought

Don't let a premium return distract you from the premium risk you're accepting.

Higher yields rarely come for free.

Sometimes, they're simply the market's way of pricing a higher probability of permanent capital loss.

#PrivateCredit #InvestingIndia #WealthManagement #FinancialLiteracy #OttoMoney