Indian IPO Companies Rush to Private Credit for Equity Protection Amid Stock Market Slowdown – Avendus Finance Leads the Way

Companies that are thinking about going public but need more time to handle current challenges are increasingly turning to private credit. Promoters of such companies are seeking private credit funds to preserve their equity before launching IPOs, especially as private equity funding has slowed, and valuations have dropped post-Covid, according to industry experts.

Private credit is becoming more popular despite high global interest rates because it offers flexible terms for pricing, loan duration, and structure. This allows companies to better manage costs and cash flow in a tough interest rate environment.

Nilesh Dhedhi, Managing Director and CEO of Avendus Finance, explains that when a company’s growth is temporarily affected by external factors, it can result in a lower valuation. In these situations, companies can use private credit to refinance debt, make acquisitions, and delay their IPO to get a better value.

For example, Avendus Finance helped a specialty chemicals company that was planning an IPO in 18-24 months. When the company received a large order needing fast capital, traditional sources like banks and private equity were too slow. The company used private credit, allowing it to double its valuation by the time it was ready for an IPO.

According to Munish Aggarwal, Managing Director of Equirus, private credit is a non-dilutive option that helps companies deal with challenges like family settlements, acquisitions, or high debt situations. It allows promoters to time their IPOs better.

In the past 12-18 months, several pre-IPO transactions have been made using private credit funds, often through non-convertible debentures (NCDs) or convertible instruments that link to equity. Vipin Singhal, Director at Anand Rathi Investment Banking, said the typical return expectations for these deals range from 14-18%.

Private credit is appealing to promoters because it doesn’t require them to immediately give up equity or board control, which private equity usually demands. However, private credit lenders, such as alternative investment funds (AIFs), protect themselves by securing assets, sponsor pledges, or personal guarantees from the founders.

Pranob Gupta, Managing Director at JM Credit Opportunities Fund, explained that when the stock market is strong, as seen with the Nifty’s 29% rise in the last year, promoters prefer private credit to avoid diluting equity early. They can raise private credit now and delay equity dilution until the timing is better.

What is Private Credit?

Private credit is a form of financing that offers more flexibility than traditional loans, bridging the gap between debt and equity. It’s often used by companies aiming for an IPO but needing flexible terms to manage cash flow. The repayment terms can vary, and private credit tends to involve lower risk than venture debt, with coupons ranging from 14-19%.

The Rise of Private Credit

Private credit has grown significantly in recent years. According to the Reserve Bank of India’s Financial Stability Report from June 2024, private credit, provided by non-bank lenders, has quadrupled over the past decade and has become an important source of funding for mid-sized firms. These companies often have low earnings, high leverage, or lack of high-quality collateral.

While private credit investments carry more risk for lenders, they also offer better returns, with greater flexibility and confidentiality.

Noteworthy Private Credit Deals

In 2023, Piramal Alt invested in Azad Engineering just as the company was preparing for its IPO. Piramal also backed Harmony Organics and Biodeal, both aiming for IPOs soon. Similarly, Kotak Alt invested in TVS Logistics, planning to secure an IPO exit later.

In May 2024, an AIF invested ₹400 crore in Biorad Medisys, a medical device manufacturer, using the funds for capital expenditure and debt refinancing. The return was tied to a future equity event.

Another major deal was Edelweiss’s $96 million financing arrangement with Biocon through equity-linked debentures. This deal offered minimum returns in the early teens and a stake in Biocon Biologics, expected to go public by 2025.

Soumendra Ghosh, Chief Investment Officer at Vivriti Asset Management, noted that flexible capital options, like private credit, help companies bridge their financial needs until they can raise equity or launch an IPO when market conditions improve. This type of funding can support business growth and provide an exit to shareholders without having to wait for an IPO.

Final Thoughts

For high-growth companies with limited operating history, venture debt can help fund growth and working capital needs. On the other hand, heavily indebted companies should consider special situations debt to help with turnarounds. While equity financing is always an option, private credit is often more cost-effective, as the cost of equity is typically higher than debt.