Mumbai: Kohlberg Kravis Roberts and Co. (KKR), one of the world’s largest private equity (PE) firms, has started offering debt finance to Indian corporations to complete its suite of products.
Globally, PE funds such as The Blackstone Group LP and Oaktree Capital Management LP do provide debt financing, but KKR has made the first move in India.
KKR has completed four debt transactions worth around Rs2,800 crore through its non-banking financial company (NBFC) KKR India Financial Services Pvt. Ltd, set up in 2009, while the PE arm has deployed at least Rs4,600 crore across five deals.
“The strategy is to be a multi-asset solutions provider,” said Sanjay Nayar, chief executive and country head of KKR in India.
“What mezzanine (rupee) financing does is that it helps companies that are still in the growth phase, and the promoter doesn’t need to dilute stake or raise expensive equity. Through this form of structured rupee debt we see ourselves as providing a real capital solution to these companies to help kick-start their growth strategy,” Nayar explained.
Mezzanine financing is a non-conventional funding that shares the characteristics of both debt and equity.
Providing debt capital helps PE firms get a competitive edge. “Besides getting us deeply involved with the company/industry, it helps develop relations with the promoters so that later on, when the money is really required and you are competing with three other firms, you are better placed,” said Nayar.
According to a fund manager of a global fund, such financing is done mostly by PE firms with proprietary capital—balance sheet money. “Funds like KKR and Blackstone, which are publicly trading, have a lot of funds with them; so it’s just a matter of capital finding a home for them,” he said. He declined to be identified as he was commenting on a rival fund.
KKR’s debt deals include funds provided to Analjit Singh’s Max India Ltd, Gautam Thapar’s Avantha Power and Infrastructure Ltd and to the privately held investment company of the Sajjan Jindal Group.
Nayar declined to disclose the details of the fourth deal, which has not yet been announced.
Such deals are typically done with companies that are asset intensive, where cash flow is weak but there is growth, equity and strategic value in the future.
“Sectors like retail, logistics, hospitality and healthcare are the potential areas which require long term capital solutions,” said Nayar.
Competition is intensifying for PEs, with close to 300 PE firms operating in the country and about 10% of them in fund raising mode. With nearly $30 billion (Rs1.34 trillion) of undeployed capital, known as dry powder, waiting to be invested, industry experts expect some big ticket deals this year.
In 2010, PE firms invested $8.3 billion across 376 deals, up from $4.7 billion deployed across 331 deals in 2009, according to VCCEdge, a financial research platform.
Mayank Rastogi, partner, private equity, at audit and consulting firm Ernst and Young Pvt. Ltd, points out that mezzanine financing and promoter funding are catching the eye of PE funds, especially the global ones that have access to low-cost funds.
“These transactions tend to be short term, ranging from six to 36 months and can provide upwards of 13% to 14% return,” he said.
According to Rastogi, more such transactions are expected, driven by promoters’ need for liquidity and non-availability of bank debt for certain purposes.
The challenge faced in such kind of deals, Nayar said, is that “you don’t always get the right interest rate for the risk because you get compared to banks and NBFC lending”.
In the US, the returns in this asset class are in the 17-18% range but in India it is around 14%.
“Currently risk capital in India is mispriced because of rush of short-term debt and equity flows, so it’s a challenge to price these structures appropriately,” Nayar said.
Apart from debt financing, KKR is looking to invest in sectors such as financial services, healthcare and pharmaceuticals. “The pipeline is robust in deals in these areas,” said Nayar.
KKR’s investments in India include $250 million in Bharti Infratel Ltd, $900 million in Aricent Inc., Rs750 crore ($167.37 million) in Dalmia Cement (Bharat) Ltd, $75 million in Coffee Day Holdings.