India’s appeal to investors is often framed through its powerful economic growth narrative — driven by a thriving tech ecosystem, an expanding middle class, and bold infrastructure ambitions. Yet, beneath this vibrant surface lies a less glamorous but increasingly attractive investment frontier: the distressed assets and special situations market.
Characterized by non-performing loans (NPLs), stressed Industrials, and underperforming companies, this segment is drawing growing interest from global and domestic investors alike.
From a private credit Investment lens, India’s special situations market is rapidly emerging as a compelling investment thesis as the banking system is saddled with 2.3% gross non-performing assets that presents an addressable opportunity of almost $45 billion. Private credit investments, reaching $9.2 billion in 2024, are capitalizing on a unique blend of regulatory reform, market maturation, and capital scarcity.
The private credit market landscape
India’s private credit market is experiencing explosive growth. From $5.5 billion in assets under management (AUM) in 2018, it has expanded to about $25 billion today and is expected to reach $60-70 billion by 2028. With over 30% CAGR, this positions India as one of the fastest- growing private credit markets globally.
The Indian banking and non-banking financial sectors have reduced their NPA pile, from Rs 13 trillion ($160 billion) to a more manageable Rs 4.2 trillion ($48 billion) currently. This cleaner balance sheet, with an evolving distressed asset resolution framework, presents an accessible environment for private credit funds to deploy capital effectively.
Regulatory tailwinds: The foundation of opportunity
The Insolvency and Bankruptcy Code (IBC) of 2016, SEBI’s framework for special situation funds, and the RBI’s Master Directions have created a robust legal and regulatory ecosystem that supports investor participation and enhances resolution certainly.
The IBC has transformed distressed asset resolution. It provides creditors with enhanced recovery mechanisms and time-bound processes, leading to impressive results: creditors have realized 161% of liquidation value and 86% of fair value. The IBC creates clear, confident pathways for private credit participation.
While entities like NARCL and asset reconstruction companies (ARCs) contribute to the broader ecosystem, private credit’s core strength lies in direct engagement with distressed assets and companies. These formal market mechanisms empower private credit investors to identify, acquire, and provide tailor made solutions with clarity regarding exit thesis.
By providing liquidity to viable businesses, facilitating exits for old lenders, and preserving jobs, private credit ensures efficient recycling of capital.
Investment strategies and return profiles
Special situations funds in India employ diverse strategies to capitalize on distressed opportunities. These include isolation or a combination of:
a) Acquiring NPLs at significant discounts offering high risk-adjusted returns
b) Providing rescue financing to fundamentally sound but stressed borrowers with temporary liquidity issues, governance lapses, or sectoral headwinds.
c) Offering performing credit to companies undergoing restructuring.
d) Aggregating distressed assets into sector-specific platforms (e.g., infrastructure, hospitality) to drive operational synergies and scale.
The sector spans both equity and debt instruments, with expected internal rates of return (IRRs) varying by strategy and risk profile.
The ideal investment for a distressed debt team is often a business with a sound underlying strategy that primarily needs financial restructuring – for instance, correcting an inappropriate capital structure. Where businesses have revived operations but struggle to attract growth capital due to legacy issues, private credit offers crucial financing to clean up the balance sheet, last mile completion, enabling re-entry into mainstream banking and future growth.
· Distress, high-yield and special situations segment: Targets expected IRRs of 15-24%, with focus on stressed/illiquid assets, turnaround and resolution.
· Performing credit to stressed borrowers: Aims for 12-18% expected IRRs, focusing on mid-market growth financing for companies with demonstrated turnaround.
The role of active management
Special situations investing demands a highly active and hands-on approach. Fund managers in this space go beyond financial restructuring, delving into operational overhauls and strategic realignments to unlock value. This involves closely collaborating with investee companies to identify inefficiencies, implement new business strategies, and optimize capital structures. This active engagement is a key differentiator, transforming struggling entities into viable, growing businesses.
Sectoral opportunities and focus areas
The stressed assets landscape offers distinct opportunities for private credit across multiple sectors:
· Infrastructure: Benefiting from lack of new capacity, growing economic activity and significant government focus.
· Real estate: Projects with strong underlying demand but facing temporary liquidity issues.
· Manufacturing: Companies with sound businesses facing temporary operational challenges and lack of growth capital.
· Financial services: NBFCs and smaller banks needing capital infusion or restructuring.
Recent regulatory changes allowing securitization of stressed retail loans also open new avenues for private credit in high-yield consumer debt markets, further diversifying opportunities.
Risks and challenges
Liquidity constraints: Private credit investments typically involve longer holding periods and limited exit options compared to public markets. Opaque distressed asset valuation and lack of standardized pricing add complexity.
Governance risks: Past mismanagement can be deeply entrenched, requiring robust due diligence and post-acquisition oversight.
Stakeholder complexity: Turnarounds often involve negotiations with multiple stakeholders—promoters, employees, creditors, and regulators which can have diversified interests and resultant conflicts.
Regulatory risks: Regulatory flux like Changes in foreign investment norms, tax laws, or asset sale procedures can materially impact investment outcomes. Additionally, the rapid expansion of private credit has drawn regulatory attention. Notable concerns include its growth with limited oversight, with potential risks to financial stability, since they have not been stress-tested in a downturn.
Execution challenges: India's complex legal framework, lengthy resolution processes, and the need for specialized local expertise are critical. Navigating regulatory requirements, conducting thorough due diligence, and orchestrating operational turnarounds demand deep on-the-ground knowledge.
Outlook and strategic considerations
India's special situations market offers compelling opportunities for sophisticated private credit investors. The combination of ongoing regulatory reforms, banking sector capital constraints, and robust economic growth creates a sustainable pipeline.
For both retail and institutional investors, accessing this specialized market through established fund managers with proven track records and deep local expertise is the most viable approach. These fund managers possess the necessary insights, networks, and operational capabilities to identify, evaluate, and execute complex special situations investments effectively.
As the market matures and regulatory frameworks continue to evolve, India's special situations landscape is poised to become an increasingly institutionalized and accessible investment avenue. It is no longer a niche play—it is a maturing asset class with significant upsides for those who can navigate its complexities.
With a supportive regulatory framework, a large pipeline of distressed assets, and growing investor sophistication, the market is poised for sustained growth.
It offers both challenges and potentially significant rewards for astute private credit investors seeking diversification and enhanced returns. However, success in this space demands more than capital. It requires deep local expertise, legal acumen, operational capabilities, and a long-term mindset. For investors willing to embrace the challenge, India’s distressed assets market offers not just risk—but remarkable opportunity.
Ankur Jain is MD for private credit strategies at InCred Alternative Investments. Views are personal.
