Munesh Khanna, formerly head of investment banking at Merrill Lynch & Co.’s unit in India, and his associates have lined up $300 million (Rs1,320 crore) to invest in companies that are distressed or need management help to revive their finances.
Khanna, 44, recently joined Halcyon Group, founded by Narayan Seshadri, formerly head of Andersen Business Consulting in India, and Abhay Soi, who oversaw the financial restructuring group at Ernst & Young.
“We want to make investments where we feel there is some kind of active ‘high touch’ management participation,” said Khanna. “This could be distressed assets or great companies which have lacked management bandwidth.”
Among the world’s 15 largest economies, only China is expanding faster than India. As companies seek capital, new funds are sprouting and buyout firms, including Blackstone Group LP, are flocking to the country. Private-equity investors poured $7.2 billion into India last year, compared with $2 billion in 2005, according to the Asian Venture Capital Journal.
The interest India has generated has made private-equity investing “very competitive,” and the stock market’s rise has raised the cost of buying stakes in companies, Khanna said.
“Some assets are definitely overvalued,” he said. “You have to have the ability to walk away. Expectations of valuations are still high. That does need to be tempered.”
India’s benchmark index has more than doubled over the last three years, reaching a record 14,652.09 on 8 February. The index has fallen about 11% since its all-time high.
There are still “plenty of opportunities” for private-equity investments in smaller companies, which may find it difficult to raise funds in the stock market as investors shift their attention to firms with higher market values, Khanna said.
“As investors get more and more sophisticated, they will demand that companies which come to the market are of critical mass, with at least a $240 million to $400 million market capitalization,” he said. “Accessing the capital markets is going to get slightly more difficult for smaller companies.”
India’s $854 billion economy, the fourth-biggest in Asia, may expand at a record 9.2% in the year ending 31 March, following a 9% gain last year, according to the government’s statistics office, making it the world’s second-fastest growing major economy after China, which grew by 10.4 % in 2006.
Few private-equity funds are interested in distressed assets or running the companies that they have invested in, as most focus on providing so-called “growth capital” to help companies expand, Khanna said.
“Distressed assets require a lot of turnaround, handholding management,” Khanna said. “There are also great businesses which lack management bandwidth. We will provide that management bandwidth and take it to the next level.”
Halcyon, which targets annual returns of as much as 25%, prefers investments in asset-backed businesses, including textile and paper manufacturers, Khanna said. Khanna oversaw the Indian unit of NM Rothschild & Sons Ltd. and worked at Arthur Andersen in India for 17 years before joining Merrill last year. Amit Chandra, his former colleague at Merrill’s Indian unit, is also starting a private-equity fund.
Halcyon is “constantly in touch” with Asset Reconstruction Co. of India Ltd, or Arcil, India’s only bad-loan restructuring company, Khanna said. Arcil has been seeking cash from investors to help buy $40 billion in non-performing debt.