ETMarkets AIF Talk| Successful private credit rests on three pillars: promoter, business and collateral: Sandeep Agarwal

Private credit has emerged as one of the fastest-growing alternative asset classes in India, attracting increasing interest from family offices, HNIs and institutional investors seeking stable, risk-adjusted returns.

But in a market where capital is abundant and competition for deals is intensifying, disciplined underwriting and robust governance have become more important than ever.

In this edition of ETMarkets AIF Talk, Sandeep Agarwal, CEO & CIO of Modulus Alternatives, explains why successful private credit investing goes far beyond chasing high yields.


He discusses the three non-negotiable pillars that shape every investment decision—the quality of the promoter, the strength of the underlying business, and the adequacy of collateral and covenants.

Agarwal also shares insights on governance-led investing, sector preferences, evolving investor appetite, and the macro factors that could define the next phase of India's private credit industry. Edited Excerpts –

Q) Modulus positions itself as a governance-led private credit platform rather than just another alternative asset manager. What does that philosophy mean in practice, and how does it influence every investment decision?
A) Being governance-led is central to who we are. Modulus was built as an independent alternatives only platform with a singular focus on fixed income and private credit, rather than as an extension of another asset management business. Our philosophy is rooted in institutional processes, transparency, independence, and long-term value creation.

This translates into clearly defined roles, independent investment and distribution teams, a rigorous investment committee with external members, and a disciplined decision-making framework. While this approach may increase operating costs, it ensures objectivity, eliminates conflicts of interest, and allows every investment decision to be driven by governance and investor outcomes rather than commercial considerations.

Q) The firm emphasises risk-adjusted returns over chasing the highest yields. How do you strike that balance in today's increasingly competitive private credit market?
A) Private credit is ultimately a business of disciplined underwriting. While competitive pressures can compress yields, we believe every investment must adequately compensate for the underlying risk. Markets are driven by demand and supply rather than theoretical pricing models, making discipline even more important.

We have clearly defined risk thresholds and, most importantly, a willingness to walk away from transactions that do not meet our standards. Preserving capital and maintaining underwriting discipline are more important than deploying capital simply to achieve higher yields.

Q) Your maiden fund completed its lifecycle with a full exit and a reported gross IRR of over 17%. What were the biggest lessons from Fund I that are shaping subsequent funds?
A) Fund I reinforced the importance of staying disciplined across every stage of the investment process. While we remain sector-agnostic within performing private credit, we continue to avoid real estate, infrastructure, and project finance.

The biggest learning has been that successful credit investing depends equally on three pillars: the quality of the promoter, the strength of the underlying business, and the adequacy of collateral and covenants.

Even an excellent business cannot compensate for weak governance or inadequate security. Just as we have a walk-away point on pricing, we also have non-negotiable standards on collateral protection and covenant quality.

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Q) Can you walk us through your investment process—from sourcing opportunities to underwriting, investment committee approvals, and ongoing portfolio monitoring?
A) Our focus begins with offering the right financing solution rather than relying solely on proprietary deal sourcing. Strong products naturally attract quality borrowers.

Every opportunity undergoes detailed underwriting before being presented to an independent Investment Committee chaired by experienced external members, where each member has voting rights and even a single negative vote prevents the investment from proceeding.

Post-investment monitoring is equally rigorous. Our team conducts regular on-site visits, engages directly with management, and continuously evaluates operational performance rather than relying only on financial reports.

We also maintain strict screening standards around promoter integrity, collateral quality, and sector exposures, particularly during periods of macroeconomic uncertainty.

Q) Beyond financial metrics, what qualitative factors determine whether a company is suitable for private credit financing?
A) Financial performance is only one part of our evaluation. We place significant emphasis on promoter integrity, governance standards, and the quality of collateral supporting the transaction.

We avoid businesses where promoters have questionable track records, governance concerns, or political affiliations that could increase risk. We also do not compromise on security structures or covenant protection, regardless of how attractive the underlying business may appear.

These qualitative filters have been fundamental to our credit philosophy and portfolio performance.

Q) Your investment themes include healthcare, consumer, industrials, specialty chemicals, and logistics. What makes these sectors particularly attractive for performing private credit today?
A) We focus on sectors supported by long-term structural demand rather than short-term cyclical trends.

Healthcare continues to benefit from rising income levels, increasing healthcare spending, and strong domestic consumption. Specialty chemicals and pharmaceuticals are well positioned as India strengthens its role in global manufacturing and supply chains.

Logistics stands to benefit from India's expanding economy, growing consumption, and improving connectivity, creating sustained demand for transportation and distribution infrastructure.

These sectors combine resilient business models with attractive long-term growth potential, making them well suited for performing private credit.

Q) Family offices and HNIs are increasingly allocating to private credit. What explains this structural shift in investor preferences?
A) The shift reflects a broader evolution in India's investment landscape. Investors are increasingly viewing fixed income not simply as a capital preservation tool but as a return-generating asset class.

Regulatory developments have improved alignment between investors and fund managers by increasing transparency, while changes in taxation have reduced structural distortions across investment vehicles.

At the same time, experiences following India's credit market stress have reinforced the importance of professionally managed private credit strategies with clearly aligned interests between LPs and GPs.

Q) Which macroeconomic variables do you believe will have the biggest influence on investment decisions over the next 12–18 months?
A) While interest rates remain important, market liquidity is likely to be the defining variable.
Private credit transactions often depend on functioning capital markets, bank liquidity, and refinancing opportunities.

A prolonged tightening in liquidity or reduced access to IPO and capital markets could affect borrowers' refinancing ability and increase stress across the industry. This is why we remain cautious on interest-rate-sensitive sectors and closely monitor overall market liquidity.

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Q) Should investors view private credit primarily as an income-generating strategy or as a long-term portfolio diversifier?
A) Private credit should primarily be viewed as an income-generating allocation that also provides portfolio diversification.

As investors increasingly allocate to fixed income for return generation rather than merely capital preservation, private credit offers the potential for regular income while maintaining disciplined risk management.

At the same time, its relatively low correlation with traditional public markets makes it an effective diversifier within a broader investment portfolio.

Q) Looking ahead, what do you believe will define the next phase of India's private credit industry—larger institutional participation, regulatory evolution, new product innovation, or something else?
A) The next phase of India's private credit industry will be driven by a combination of regulatory evolution, greater institutional participation, and product innovation.

Developing a secondary market for private credit investments, introducing more flexible fund structures, and aligning products with global private credit standards will enhance investor participation.

At the same time, increasing allocations from pension funds, insurance companies, and other institutional investors will significantly expand the available pool of long-term capital. With continued regulatory support, private credit is well positioned to play a much larger role in financing India's growth.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)