Lone Star Funds firms up India ARC plans

US-based firm Lone Star Funds files ARC application with RBI, eyeing the massive bad loan-related opportunity in India


Lone Star is a global private equity firm that invests in real estate, equity, credit and other financial assets.
Lone Star is a global private equity firm that invests in real estate, equity, credit and other financial assets.

Mumbai: The US-based stressed asset specialist Lone Star Funds has applied to the Reserve Bank of India (RBI) to set up an asset reconstruction company (ARC) with an eye on the massive bad loan-related opportunity in India, three people aware of the development said.

“They have been scouting the Indian market for the last couple of months for stressed assets opportunities in the power and infrastructure sectors. As part of their strategy to tap this opportunity they have applied to RBI for setting up an ARC,” said one of the three persons cited above, requesting anonymity as he is not authorized to speak to reporters.

The ARC will be part of an India platform that Lone Star is looking to build, said the second person mentioned above.

“They are in the process of setting up a team to manage stressed infra assets in India. They are also looking to raise a new fund currently, a significant part of which will likely be dedicated to India,” he added.

Lone Star Funds declined to comment on the development.

Lone Star is a global private equity firm that invests in real estate, equity, credit and other financial assets. Since the establishment of its first fund in 1995, Lone Star has raised 16 PE funds with aggregate capital commitments totalling over $65 billion, according to the fund’s website.

Lone Star seeks opportunities in markets where liquidity is restricted and financing is constrained, where balance sheets of financial institutions are in stress and there is a need to dispose of high volumes of assets to manage capital, deleverage and build liquidity.

Mint reported 19 October that Lone Star is in discussions with infrastructure conglomerate GMR Group to acquire a significant stake in GMR Chhattisgarh Energy Ltd, a unit of GMR Energy Ltd.

With its plans to start an ARC, Lone Star joins the ranks of funds and financial services institutions that are looking to tap the huge bad loans mess that faces the Indian banking system.

The gross bad loans of 39 listed Indian banks, in absolute terms, rose 92% in fiscal 2016 to Rs5.79 trillion.

The Lone Star move comes after the government, seeking to resolve problem of mounting bad loans in India’s banking sector, decided in May to allow foreign institutions to fully own ARCs.

Although local banks have trillions of rupees worth of bad loans on their books, the capital lying with existing ARCs in India is enough to buy only a fraction of the stressed assets available.

India’s attempt to rid its banking sector of stressed assets is providing an opportunity for those with experience and the funds to turn around assets.

Amongst those who have applied for setting up ARCs are global stressed asset specialist JC Flowers and Co., in partnership with Ambit Holdings Pvt. Ltd, domestic financial services firm IIFL Holdings Ltd and Sudhir Valia, the former chief financial officer of Sun Pharmaceutical Industries Ltd.

Other global private equity funds, such as KKR and Co., Hong Kong-based SSG Capital Management and International Finance Corp. (IFC), the investment arm of the World Bank, have already acquired stakes in existing ARCs to buy bad loans.

In January 2015, IFC invested in Encore Asset Reconstruction Co. Pvt. Ltd.

In March this year, the Foreign Investment Promotion Board gave approval to KKR & Co. for picking up a stake in International Asset Reconstruction Co. Pvt. Ltd.

Most recently, ICICI Bank Ltd, State Bank of India (SBI) and Brookfield Asset Management Inc. announced plans to launch joint ventures to invest in stressed assets.

In July, the country’s largest lender SBI tied up with Brookfield Asset Management Inc. to form a join venture fund for purchasing distressed assets. Brookfield has committed to invest Rs7,000 crore in the venture.

In August, billionaire Ajay Piramal-led Piramal Enterprises Ltd said that it is launching a $1 billion-distressed asset investment platform in association with private equity fund Bain Capital Credit.

Multiples Alternate Asset Management Pvt. Ltd, a private equity fund led by Renuka Ramnath, is also in the process of venturing into stressed assets investment.

The firm has hired Sharad Bhatia, former chief executive officer of Phoenix ARC Pvt. Ltd, to head the business, Mint reported on 21 September.

More From Livemint