Mumbai: Sanjay Nayar, chief executive officer of private equity giant KKR’s India arm, in an interview talks about the macroeconomic situation, the bankruptcy and insolvency code, and the challenges and opportunities it presents, as well as KKR’s focus in India in the private equity and credit businesses. Edited excerpts:
We have been seeing a dip in GDP growth and that has sparked a lot of debate around the state of the economy, lately. As a private equity investor looking to deploy long-term capital, how do you view the economy in the current context?
I believe the current dip that we are seeing in the macroeconomic indicators is a passing phase. By the end of the next two or three quarters, we will come back to a 6.5-7% GDP growth rate. In the last couple of years, we have got several well-meaning reforms done such as a bankruptcy code, RERA, GST and demonetisation, all leading to a much higher degree of institutionalization in the economy. For foreign investors like us looking to deploy long-term capital, this is music to the ears.
Do you see room for more structural reforms? What do you think are some areas that need to be tackled?
The larger question is whether we want to be between the 6-7% range or do want to break out of this. For that, you need big structural reforms. You have to tackle the tough questions like land, labour and banking. We need to build a much more robust capital market where over time, the government gets out of the way of private savings through massive fiscal consolidation.
On banks, the big question is how do you tackle the NPA issue and the bigger question is why own them at all. If one was to achieve a lot of the above in the next 3-5 years, I think India could definitely shoot for a structurally new level of growth between 8% and 10%.
On the NPA side, we have seen a lot of movement recently. What’s your view on the way the bad debt resolution process is evolving?
It is a largish problem. Banks have completely shut down on lending and even good companies are not getting working capital, especially at times like these when GST and demonetisation are creating extra working capital requirements.
My personal view is that we need to do a surgical strike on this front, create a bad bank or a bad AMC, at least for a part of the problem, take the hit and move on. This is not out of the ordinary, and has happened in Italy and Greece as well as China, which is doing a third tranche of bad AMC.
If you delay this too much, then well meaning assets that are not getting working capital will get mothballed. A proper asset will become a junk asset and you will get a mere liquidation value.
At KKR, we are indeed looking at playing a constructive role in this area by bringing to bear long term capital and resolution expertise.
What about providing interim finance to these cases that are in the NCLT? Is that an attractive opportunity?
We have done one deal of that kind already. We are looking at this space. As long as we are recognized as the super senior, we don’t have an issue. The one flaw, as the rules exist today, is that by any chance if the company goes into liquidation then we rank pari passu with everybody else. We are trying to see if that can be corrected.
With a new $9.5 billion Asia fund, what are some of the themes on the private equity side that KKR is looking at in India?
We think there are two-three big themes driving our private equity strategy. Every firm, from large conglomerates to SMEs, is reinventing their business model.
At one level, we are working with the big conglomerates to see how we can help deconsolidate and give them the much required capital for growth and other areas. At the other end, we are trying to help medium-sized firms with growth capital and build them up to global scale and productivity.
We are also backing platforms that represent an opportunity to build on the theme of consolidation because of fragmentation in certain sectors and Radiant Healthcare and Avendus, in financial services, are two good examples of that.
KKR has been one of the most active investors on the credit side. How do you see that business of yours growing in the coming time?
On the credit side, we are seeing a lot of deals both on the real estate and corporate credit side, because as I mentioned earlier, firms need extended working capital.We are seeing a lot of demand from low income and middle income housing. Thanks to RERA, Sarfaesi, we are more confident to lend to this sector because of the inherent institutionalization.
In India besides our two NBFCs, we also have a local AIF with about $400 million under management and we are looking to grow our entire credit business keeping in tune to the needs of the SMEs and the real estate sector in India.
You are also part of the US-India Strategic Partnership Forum (USISPF). As a revamped organization and given the current political context, what is the role that USISPF aspires to play in the economic relationship between the two countries?
It’s about strategic engagement and political advocacy so that both the countries can figure out a way forward in terms of increasing trade and commerce, at one end, and technology and capital at the other. Today, most countries are becoming quite insular and looking inwards. So bodies like these help you build a lot of trust, starting at the legislature level with the parliamentarians in both the countries and of course the bureaucracy. It is difficult, unstructured and challenging as a new administration has recently come into place in the US, but that’s our mission.
There is significant interdependence between both India and the US. India could do well with innovation, technology and capital and US could a lot with the soft skills and enhanced trade. And the role USISPF can play is to debunk a lot of noise and get to the promise of a healthy economic relationship based on strategic dialogue.