Most market participants now understand “private equity” as an equity transaction executed on a bilateral, negotiated basis. “Private credit” too represents a similar construct on the debt side—a bilateral, negotiated debt transaction approached with an investor’s mindset. In essence, private credit is debt structured and monitored using an investment approach.
The key distinction lies in mindset. A conventional lending approach focuses on capital preservation and the probability of money coming back, while an investment approach seeks value creation over time. If the value of the underlying business expands, all stakeholders, including the provider of capital, stand to benefit. The emphasis shifts from merely securing one’s claim on the pie to helping increase the size of the pie.
The nature of the relationship is also different. Conventional lending often maintains distance between borrower and lender, with the latter stepping in only when repayment risks arise. In private credit, the relationship looks more like that between an investor and a business partner. Investors stay actively involved, monitoring performance, anticipating business risks, and engaging with promoters to solve problems before they become financial ones. This partnership-driven approach demands a deeper alignment of interests and a willingness to take an active role in the borrower’s success.
The time horizon of analysis is different, too. Lending decisions tend to rely heavily on past performance, often assuming that the future will broadly resemble the recent past with limited deviation. This can be an inadequate guide when the business is at an inflection point or operating in a rapidly changing environment. An investment approach is more forward-looking. It emphasises the future potential of the business, assesses current realities, and tests assumptions to arrive at a conviction about where the business can go rather than where it has been.
Collateral is another area where the contrast is stark. In traditional lending, security and collateral often become the centrepiece, the comfort that if “Plan A” does not work, “Plan B”, which is the enforcement of collateral will do. A private credit investor does not ignore security, but the primary comfort comes from conviction in “Plan A” itself. Capital is committed only after detailed due diligence and a deep understanding of how the business is expected to perform. The focus is on making the business plan work, not on preparing for its failure.
Finally, the two approaches differ in their degree of customisation. Lending models strive for standardisation, governed by uniform parameters and minimal discretion. Private credit, on the other hand, is inherently bespoke. Every transaction is tailored to the borrower’s circumstances, evolving dynamically as the business changes. No two private credit deals look alike, because no two businesses face the exact same situation.Eligibility and timing also diverge. Traditional lending typically becomes available only when a business fits certain standard criteria – size, track record, ratios, collateral cover and so on. Comfort is often drawn from macro indicators, industry reports, external credit ratings and broad sector trends. Private credit, by design, can operate across the business lifecycle. It can provide growth capital, bridge financing, bespoke refinancing, or even structured solutions in periods of stress or transition. The key is not whether the borrower fits a template, but whether a viable structure can be created around the underlying business reality.
Ultimately, the power of private credit lies in its adaptability. By merging the lender’s discipline with the investor’s vision, it bridges the gap between debt and equity, offering capital solutions that are both prudent and growth-oriented. This ability to straddle both world positions private credit as a vital, enduring component of modern capital structures.
As Indian businesses diversify their funding sources and capital structures become more sophisticated, private credit makes a compelling case to be treated not as an exotic alternative, but as a permanent and integral part of the capital stack.
Author: Nilesh Dhedhi, Managing Director and CEO, Avendus Finance
