Private credit funds: meaning, how they lend to Indian companies

A private credit fund raises money from investors and lends it to companies for a fixed term. It earns interest and fees, and returns the money to its investors as loans are repaid. Unlike a bank, it does not take deposits. Unlike a venture capital fund, it does not own shares in the borrower for the upside.

Borrowers are mid-sized and growing companies, real estate developers, and firms that need a custom loan, such as one for an acquisition or one that must be sealed fast. The loan is often secured against assets, shares or cash flows, and the fund negotiates its terms directly with the borrower.

The live case: Neo, a Mumbai wealth and asset management group, closed its second private credit fund at ₹6,200 crore in November 2026, above a target of ₹5,000 crore, drawing family offices and institutions. Its first fund closed in 2024 at ₹2,575 crore.

Investors, called limited partners or unit holders, commit money, and the manager calls it in as loans are made. Loans usually run for a few years. The fund collects interest during the term and principal at the end, then pays investors their share, less fees. A fund has a fixed life, often five years or more, after which it winds down.

Because the loans are not traded, the fund holds them to maturity. This is why investors accept a lock-up in exchange for a higher yield than a bank deposit or a listed bond of similar quality.

Fees follow the usual fund pattern. A manager charges a yearly management fee on committed or invested money and may take a share of profits above a minimum return, called a hurdle. Investors should read how those fees reduce the yield they keep, since the loan rate quoted in a story is not the return they receive.

• Investors commit capital to the fund.
• The manager lends to chosen companies in tranches.
• Borrowers pay interest, and sometimes fees and a share of upside.
• Principal comes back at maturity or earlier on a refinancing.
• The fund returns money to investors and then closes.

Most private credit funds in India register as Category II alternative investment funds under the SEBI AIF Regulations 2012. A Category II fund may not borrow to fund its investments, apart from limited short-term needs, as of November 2026. Rules on borrowing and on charges over assets were tightened in 2024 and the position is amended from time to time, so check the current text.

Each investor must commit at least ₹1 crore, which keeps these funds for wealthy individuals, family offices and institutions rather than for the general public. SEBI has also set separate lighter schemes for accredited investors. The RBI has restricted banks and non-bank lenders from putting money into AIFs that then lend to their own borrowers, a rule aimed at hiding bad loans, and it has changed the details since 2023.

Typical investors are family offices, high net worth individuals, insurers, pension funds, and overseas institutions. They are drawn by yields above bank deposits, by contracts that often carry security, and by the fact that returns do not depend on a share price rising.

The reverse trade-off is liquidity. Money is locked in for years, and a poor loan cannot be sold quickly. Investors rely on the manager's credit checking, so the manager's track record matters more than any single loan.

Some funds add a feeder structure for overseas investors, or are run from the GIFT City financial centre. Tax and rules differ across these routes, so an investor should ask the manager which route applies to them. Investors also look at concentration. A fund that lends large amounts to a few borrowers is riskier than one that spreads the same money across many, and a track record of repayments matters more than the headline size of the fund.

A private credit lender asks for a higher rate than a bank, since the borrower is riskier or needs speed and flexibility. The rate depends on the borrower's strength, the security offered and the loan's length. Funds may add an upfront fee, a share of future equity value through warrants, or covenants, which are promises the borrower must keep, such as limits on more debt.

A fund that holds good security can accept a lower rate, and a loan without security needs a higher one. Reading a fund's results means asking what share of loans are secured, how long they run and how many have been repaid.

Defaults are the main risk. A borrower can stop paying, and recovery then depends on the value of the security and on how quickly it can be sold or enforced through courts or the insolvency process. Managers therefore track the share of loans that are late and the amount written off, and good funds publish those figures.

Venture debt is a small loan to a startup backed by venture capital, often paired with warrants, and is repaid from the next equity round. The lender relies on the backing of equity investors. Private credit is wider: its borrowers include established, profitable or asset-heavy firms, and the lender looks at cash flows and security rather than at the next funding round.

Venture debt sits in a niche, with small tickets and startups as borrowers. Private credit funds can write large cheques, and fund size gives them reach. Some managers run both. Neither is a bank loan, and neither has the same regulation as one.

• Venture debt: startups with equity backers, small loans, warrants, repaid from the next round.
• Private credit: mid-sized and established borrowers, larger loans, security and covenants, repaid from cash flows.
• Bank loan: regulated by the RBI, funded by deposits, usually cheaper and slower.

A fund close announcement tells you what investors committed, not what has been lent. Check the target, the number of loans made, the share already repaid and the loss record. A fund that reports loans made and exits, as the Neo fund did with 35 investments and 17 exits in its first vintage, gives more evidence than a size figure alone.

Regulation of private credit is changing. This guide explains the idea and is not investment advice. Check with a registered adviser before putting money into any fund.