PE firms dabble in debt as equity deals find few takers

Indian promoters increasingly prefer to raise debt and investors seem ready to offer it through structured deals or their NBFC arms
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First Published: Sun, Aug 04 2013. 11 56 PM IST
A file photo of Kohlberg Kravis Roberts India CEO Sanjay Nayar. KKR started its India non-banking financial company—KKR India Financial Services—four years ago and has so far funded close to 30 companies, lending roughly `8,000 crore. Photo: Hemant Mishra/Mint.
A file photo of Kohlberg Kravis Roberts India CEO Sanjay Nayar. KKR started its India non-banking financial company—KKR India Financial Services—four years ago and has so far funded close to 30 companies, lending roughly Rs.8,000 crore. Photo: Hemant Mishra/Mint.
Mumbai: Coffee Day Holdings Co. Pvt. Ltd, the holding company of India’s largest coffee outlets chain Café Coffee Day (CCD), is in talks with a clutch of private equity (PE) investors and non-banking financial companies (NBFCs) to raise Rs.500-700 crore in debt and equity.
It is not alone in looking for raising debt from NBFCs and equity from PE investors.
In July, India and US-based Global Analytics Holdings Inc. raised $30 million in debt funding from Crystal Financial LLC, an independent commercial finance company in the US.
In April, promoters of Manipal Education and Medical Group International India Pvt. Ltd raised a debt of about $260 million. Before that, renewable energy producer Green Infra Ltd raised close to Rs.500 crore from Piramal Enterprises Ltd in a structured deal with debt and equity components.
Corporate debt has become the buzz word for PE investors in India. Indian promoters are increasingly preferring to raise debt and investors seem ready to offer it through structured deals or their NBFC arms that could either be a part of their investment group or backed by them.
For holding companies that have both PE investment businesses in India as well as NBFCs, the number of companies backed through debt is far higher than equity transactions.
The market is tilting towards debt as promoters are finding that premium on equity is very high. “It is 30% now from 20-24% earlier,” said Saurabh Bhat, chief executive, Ambit Finvest Pvt. Ltd, an NBFC that is a part of Ambit Holdings Pvt. Ltd.
Ambit Holdings also has a PE fund called Ambit Pragma, besides the NBFC. Since it was founded in 2010, the NBFC has funded nearly 30 companies. Ambit Pragma, on the other hand, has invested in six firms, according to its website. It was set up in 2007.
Substituting equity with debt is better from a risk-return perspective, said Bhat. “PE transactions give 20-24% returns; mezzanine financing (a hybrid of debt and equity) can generate returns of 17-20%. These returns are not too different but come in a significantly lower risk environment. Better predictability of returns is prompting some investors to invest in mezzanine structures,” said Bhat.
According to him, existing investors are encouraging companies to raise debt than equity particularly if the firms have achieved Ebitda (earnings before interest, taxes, depreciation, and amortization) break-even.
“For working capital and asset financing also existing investors are encouraging companies to take debt and not dilute equity,” Bhat said.
Investors typically put in money across debt and equity, depending on their risk and return appetite. Focus on one or the other is dependent on economic cycles, dislocations in markets and individual risk and return trade-off assessment. The depreciating currency, high inflation, corruption at high places and poor corporate governance have now led to a higher risk premium for the country. This is making the cost of equity in India relatively higher than in other parts of the world. In such a scenario, equity deals have become difficult.
“There are a lot of companies today that need debt for growth capital, and our strategy is to be a multi-asset solutions provider as mezzanine financing helps firms that are still in the growth phase, and the promoter does not need to dilute stake or raise expensive equity,” said Sanjay Nayar, chief executive officer, KKR India.
KKR started its India NBFC—KKR India Financial Services Pvt. Ltd—four years ago to offer debt finance to Indian firms. So far it has funded close to 30 companies, lending roughly Rs.8,000 crore. KKR as a PE investor has been active in India since 2006, with total investments exceeding $1.1 billion.
“Having an NBFC alongside the PE business will be an additional offering when we are dealing with a conglomerate, an entrepreneur or a business, where the needs are not necessarily pure PE,” said Nayar.
KKR is not the only one to be bullish on debt in India. PE firm Clearwater Capital Partners, for example, also has an NBFC arm in India. Karthik Athreya, director, Clearwater, said there is a huge opportunity for smart onshore and offshore capital to cater to the liquidity needs and create outsized returns in India, in the wake of the current tight liquidity, historically high interest rate regime, and capital-starved companies.
“We are seeing secured credit returns of around 20% on a sustainable basis over the next four-five years around which we are anchoring the growth of our financial services platform in India,” said Athreya.
“Equity returns from Indian investments will find it hard in the current scenario to meet the minimum return threshold of most short- to medium-term foreign investors,” a Xander Group Inc. spokesperson said.
Xander, a global investment firm focused on the infrastructure, hospitality, retail and real estate sectors, has committed over $1.5 billion in India since 2005 across 32 PE deals. It started its NBFC called Xander Finance in India in 2010 “in response to the dislocation in the financial markets”. So far, the NBFC has done 12 transactions worth $120 million.
“Given the protections that debt brings and the very poor standards of corporate governance and agency problems in India, which create substantial risk for equity investments, it is no surprise that many firms are looking at debt as a safer avenue during the current period,” said the spokesperson.
Experts say NBFCs also have an advantage over banks as their turnaround period for disbursing a loan is shorter and their risk appetite is higher. Also, NBFCs have more control as lenders in terms of collateral.
According to experts, online firms or similar companies will not attract debt and will be significantly funded by equity. “Real estate and SMEs (small and medium enterprises) will see a combination of debt and equity deals. For proprietary technologies and products, debt will come handy,” said Bhat of Ambit Finvest.
Experts say globally a combination of debt and equity structures have done well. “It was a missing piece in India and the current economic growth and market conditions are bringing it in India now. Frankly, pure equity has not worked in India as was expected,” said a fund manager, who declined to be named.
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First Published: Sun, Aug 04 2013. 11 56 PM IST
More Topics: NBFC | sanjay nayar | KKR | Ambit | Xander |
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