Private Debt Funds Explained: A Guide for Indian Businesses

When bank lending is constrained, or equity dilution is undesirable, many Indian businesses turn to private debt funds for structured, non-equity capital. These funds provide loans to companies outside the public markets, often with customised covenants, faster execution, and flexible repayment terms.

For founders and finance leaders, private debt can be a way to fund growth, acquisitions, or working capital without giving up control. In India, private debt typically flows through Alternative Investment Funds (AIFs) and specialised private credit vehicles that partner with companies at different stages.

Key Takeaways

• Private debt funds are pooled investment vehicles that lend directly to companies instead of buying public bonds or equity.
• They offer customised debt (direct lending, mezzanine, venture debt, asset-backed) and can move faster than banks.
• In India, private credit often operates via AIF structures and has grown as bank credit tightened and demand for flexible capital rose.
• Key benefits for borrowers: speed, structure flexibility, and larger ticket sizes; for investors: yield and portfolio diversification.
• Risks include illiquidity, covenant complexity, and sensitivity to macro stress, careful credit selection and covenants matter.

What Are Private Debt Funds?

Private debt funds (also called private credit funds) raise capital from institutional and high-net-worth investors and originate loans to companies. Unlike bank loans, these are typically held on fund balance sheets and repaid from borrower cash flows or sale proceeds. Fund managers price risk, set covenants, and monitor performance actively.

Common borrower uses include growth capital, leveraged buyouts, acquisition financing, working capital, and refinancing existing debt. In India, such lending is frequently structured through Category II AIFs or other private credit vehicles managed by NBFCs and fund managers.

If you’re exploring private debt or other non-dilutive options, comparing structures early makes a difference. Recur Swift is designed for revenue-backed startups looking for fast, unsecured business loans with clear terms.

How Private Debt Funds Work

1. Fundraise: Managers raise capital from institutions, family offices, and wealth managers into a fund with a target strategy and vintage year.
2. Origination: The fund sources loans, direct lending to mid-market firms, structured credit, or asset-backed deals, often via the manager’s origination network.
3. Underwriting & structuring: Deals are underwritten with bespoke covenants, collateral (if any), and repayment schedules suited to the borrower’s cash flow.
4. Monitoring & servicing: Fund teams actively monitor performance and enforce covenants when needed.
5. Realisation: Loans amortise or are repaid at exit; the fund returns capital and yield to investors according to its terms.

Practical note for Indian companies: documentation, clear cash-flow modelling, and transparent governance speed up the appraisal and closing process.

Also Read: Understanding Working Capital: Formula, Components, and Management

Key Private Debt Types & When They Fit

• Direct lending / senior secured loans: First-ranking claims on assets; used by mid-market firms needing term financing or CAPEX. (Lower risk within private credit.)
• Mezzanine / subordinated debt: Higher yield, used when borrowers want minimal dilution but accept higher interest or warrants. Suitable for growth or buyout financings.
• Venture debt: Shorter tenor loans for startups with recurring revenue; often paired with warrants or covenants tied to performance.
• Asset-backed & receivables financing: Loans secured by receivables, inventory, or other assets; useful for working capital.
• Distressed & opportunistic credit: Buying or lending against stressed assets, higher return, higher credit complexity.

Choose the strategy based on your stage, collateral availability, and repayment certainty.

Also Read: Top 10 Sources of Debt Financing Every Entrepreneur Should Know

Why Companies Choose Private Debt (Practical Advantages)

• Speed and certainty: Funds can close faster than banks or syndicated loans when underwriting and documentation are aligned.
• Custom structures: Covenants, amortisation schedules, and repayment terms can be tailored to your cash-flow profile.
• Size and continuity: Private credit can provide larger, multi-year tickets that bridge growth phases without equity dilution.
• Confidentiality: Private transactions are less public than equity rounds, useful for strategic reasons.

These benefits matter when timing, control, and repayment predictability are priorities for your business.

Why Investors Allocate to Private Debt

• Yield premium: Private credit typically offers higher yields than comparable public debt, compensating for illiquidity and complexity.
• Diversification: Returns often have lower correlation with equities, aiding portfolio construction.
• Control & downside protection: Senior secured structures and active monitoring can provide a different risk/return profile than equity.

However, these advantages come with operational demands: investor due diligence, manager selection, and governance oversight are critical.

Risks & Due Diligence (What Borrowers Should Ask)

• Covenant complexity: Understand financial covenants, reporting frequency, and triggers for default or accelerated repayment.
• Cost & amortisation: Private debt can be pricier than bank loans. Compare total cost (interest + fees) against bank alternatives.
• Refinancing risk: Ensure repayment profiles match your expected cash flows to avoid refinancing stress.
• Manager track record: Assess the fund manager’s underwriting experience, collections history, and sector expertise.
• Macro sensitivity: Rising rates or economic stress can affect both borrower liquidity and asset valuations, stress-test your models.

A solid due diligence checklist reduces surprises at signing and over the life of the loan.

How Businesses Can Access Private Debt in India

1. Approach fund managers or AIF sponsors directly. Best for larger tickets or strategic borrowers.
2. Work with intermediaries and marketplaces. They can aggregate offers and reduce search time.
3. Use NBFCs and specialised credit platforms for asset-backed or receivable financing.
4. Structure governance and reporting to match fund expectations (monthly cashflow reports, KPI dashboards).

If you want to compare multiple institutional credit options quickly, Recur Club’s AI-enabled marketplace connects you with lenders and structured debt providers, helping you evaluate offers that match your cash-flow profile and growth plans. This saves time and improves the chance of finding a structure aligned to your business needs.

Practical Checklist Before You Seek Private Debt

• Prepare 24–36 months of cash-flow forecasts and scenario stress tests.
• Document major customer concentration, receivable ageing, and supplier terms.
• Identify preferred collateral and any encumbrances.
• Decide on the acceptable amortisation and covenant flexibility.
• Shortlist fund managers with sector experience and transparent track records.

This checklist helps you negotiate terms that match operational realities.

Conclusion

Private debt funds offer Indian companies a credible alternative to bank loans and equity—providing flexible, structured capital tailored to growth, acquisitions, or working capital needs. The choice of manager, covenant design, and alignment with cash-flow timing are the deciding factors for success.

If you’d like to compare term sheets from institutional lenders and find a debt structure that fits your business, book a demo with Recur Club to see how multiple options stack up for your specific cash-flow and growth plans.

FAQs

1. How is private debt different from a bank loan?

Private debt is typically provided by funds or NBFCs with bespoke structures and active monitoring; bank loans follow standard credit policies and may be slower or more collateral-focused.

2. Can startups access private debt?

Yes, venture debt and structured growth loans are available for startups with recurring revenue or clear repayment paths, but lenders will assess cash flow and downside scenarios carefully.

3. What is an AIF and why is it important in India?

An AIF (Alternative Investment Fund) is a regulated vehicle many managers use to pool capital for private credit and other private market strategies in India.

4. Are private debt funds more expensive than bank loans?

Often they carry higher yields to compensate for illiquidity and risk, but they offer structure and speed that can justify the cost when timing or dilution is a concern.

5. What minimal documentation do fund managers typically require?

Expect detailed financial statements, cash-flow forecasts, ownership and governance documents, customer and supplier contracts, and clarity on collateral or security arrangements.