Private equity (PE) in India is being recognized as a form of capital that can add a lot more value than just being another avenue for fundraising, Sanjay Nayar, chief executive officer of KKR India, said in his keynote speech at Mint’s India Private Equity Conclave 2017.
“Private equity capital is beginning to get accepted by the government and the corporates and the entrepreneurs as a form of capital that is actually more than just capital. From the government’s point of view, I think they have realized that $20 billion to $40 billion every year in all forms of private capital is a very significant amount of capital,” he said.
Nayar’s KKR has been an active investor in India. The buyout company is upbeat on India and sees big potential in private credit in the region.
It has invested about $1.4 billion in India through its PE vehicle and close to $3.5 billion through structured financing in about 62 firms in India, including GMR Holdings Pvt. Ltd, Avantha Group and Apollo Hospitals Enterprise Ltd.
The PE company is also setting up an asset reconstruction company to acquire stressed assets.
The increased acceptance and importance of private capital comes at a time when the global macro environment is favouring PE over other investment alternatives, said Nayar.
“Public markets are structurally very difficult to deal right now. Hedge funds have not done very well. Globally, a small shift by pension funds to the private markets has yielded massive fundraising results. In 2016 alone, as per McKinsey, over $650 billion was raised,” said Nayar.
A large chunk of this capital is focused towards Asia and India, he said, adding that people are going to put a lot more money to work in India.
However, Nayar pointed out that while there is growing acceptance and availability of capital, the style of investing that was prevalent in the last decade has changed and that firms will have to adapt to these new dynamics to tap some of the new opportunities that are up for grabs in the market.
“Private equity teams in India would have to be very focused on longer-term dialogue with corporates and conglomerates to try to figure out what opportunities they can create. That means our teams have to be very proactive, they have to have a lot of outreach. They have to be extremely thematic, you can’t chase every deal in the market,” he said.
On the opportunity side, Nayar said that areas such as special situations and distressed assets are big opportunities for PE capital.
“We are finding that there are unique situations at promoter levels or family levels, either because of succession planning, or because of leverage, and those are situations in the private space which are yielding big opportunities. There is a lot of money available in special situations that can translate into attractive opportunities for private capital,” he said.
Distressed assets, despite the lack of deals, continue to remain an attractive space, said Nayar. The space could see significant action if all the involved parties—the government, banks and private capital—reach a framework that works for all, he added.
“You can create a tripartite arrangement where you have involvement of the government, the banks and private capital providers, and create a kind of a level playing field where you can put in the assets that are so-called distressed. You have the right amount of new capital coming in to revive the company, give them new working capital, new capex (capital expenditure) for maintenance and then try to turn them around over time. And then have a waterfall, where the private capital gets paid first, at least for its new money, the banks get paid in the form of their dues and after that everybody shares in the form of some equity returns,” said Nayar.
Such tripartite arrangements have been experimented within Italy and Greece and early results are being seen, added Nayar.
Indian banks are sitting on a bad loan pile of at least Rs6.8 trillion and while a lot of PE firms have expressed interest in the stressed assets sector, there haven’t been too many deals because of valuation issues and the reluctance of lenders to take a haircut.
Improved market sentiment and the passing of the new bankruptcy code are among factors that have encouraged foreign and domestic fund managers to bet big on the growing investment opportunity in the private credit space, especially in distressed assets in India, industry experts said earlier.
The veteran banker-turned-investor added that the expectation is that infrastructure investing will be marked by more stable returns, less risk and better government policies in the coming years in India.
“I think the opportunity for those looking for stable returns is massive in India. But for that, the government will have to step up and give you the comfort that they can remove the early minefields,” said Nayar.
He, however, said that exits for PE investors will remain a challenge.
“We will all have to remember that exits are not going to be easy. We are not a very deep capital market. Ultimately, most of our companies and ideas that we have will probably go back in strategic hands, maybe some into the capital markets,” concluded Nayar.