The Diversification Debate: Indian Private Credit

This piece was originally published on LinkedIn in 2024. I am reposting it here on my personal blog as part of an effort to bring my older writing on Indian Private Credit into one place.

Billionaire investor Warren Buffett famously stated:

"You know, we think diversification is — as practiced generally — makes very little sense for anyone that knows what they're doing... it is a protection against ignorance."

He said this in the context of equity investing. And he is damn right.

It pays to take concentrated bets in the circle of your competence when doing equity. One great and large deal can hide a couple of poor deals, or maybe more. In Venture Capital, I heard a term recently called "a dragon deal" — a deal which returns the entire fund corpus. You see where I am headed with this.

However, even in equity, please think of Buffett's comment in the context of the environment he is operating in.

A strong US economy. Governance that is top notch. Companies that are stronger. Access to permanent capital. He can sip a Coke all day long and live with volatility in his portfolio as long as the fundamentals of the company remain strong.

He has the luxury of living through cycles without redemption pressures or limited fund life.

If you have the same set-up, please go ahead.

Why concentrated bets don't translate to limited-life funds

Even in Private Equity funds or VC funds — any limited life equity fund — the argument in favour of concentrated bets does not hold up the same way.

The pressure of a fund's limited life can force you to exit your largest position without it playing out fully. Buffett has no such pressures. A limited-life fund manager does.

And in debt, the argument flips entirely

In debt, one gets the same returns every year. Taking an outsized bet on a deal does not reward you any better — unlike in equity.

So it makes no sense at all to take concentrated bets in credit.

Combine that with a not-so-great collateral enforcement regime in India, and the argument gets even stronger in favour of diversification.

Therefore, in Private Credit Funds — and in fixed income as a category in general — there can never be over-diversification.

The real question is practicality

It really boils down to the practicality of diversification:

• How many deals can you do in a limited deployment period
• How large is your opportunity set
• Execution difficulty — there is no exchange like in listed equity for you to go and click a button and buy a position in Private Credit; every deal is a primary and curated deal
• There is no secondary trading either; you don't buy and sell your debt positions ("illiquids" in India are truly illiquid)

These are the real constraints. Not the philosophical question of whether to concentrate or diversify.

On the whole, therefore, left to me, I would always do "more deals" than "less deals" in Indian Private Credit.

Kapil Singhal is Managing Partner at True North Private Credit.