Private debt vs private equity: What lies ahead?
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Private equity has been the preferred choice of capital for companies and promoters to fund growth, but private debt is slowly but steadily emerging as a suitable alternative without divestment of equity.
A panel discussion on Private Debt—A Significant Alternative to Private Equity at Mint’s India Private Equity Conclave 2017 brought together some of the leaders from India’s private debt industry who delved deep into issues pertaining to the private debt market and the emerging trends that are likely to define industry standards in the coming years.
The panellists discussed the possible structures that the private debt industry can explore to increase market share, the impact of growing industry competition and its impact on credit underwriting as well as pricing.
“If you look at the US market, almost 85% of primary capital comes from non-bank sources. But if you look at the Indian scenario, around 80% of the capital comes from banks,” said B.V. Krishnan, head of KKR’s capital markets and third party credit investing business in India.
“There is not enough capital. You are over dependent on one source. The incremental lending will come from non-bank sources. It will give enough opportunities to everyone,” he said, adding, “as more people come into the business, pricing will become lower and private debt providers will become more solutions-oriented.”
The banking industry has rigid accounting norms for (non-performing assets) NPAs and is not able to lend to accounts that have been declared NPAs for any reason, said Nitin Jain, chief executive officer of global asset and wealth management at Edelweiss Financial Services. “However, there are enough situations where due to volatility of earnings, an account has become an NPA. These are situations where debt can still be serviced with a little help. We like those situations and we can give customized solutions.”
Kalpesh Kikani, managing director and senior partner at AION Capital, a partnership between Apollo Global and ICICI Group, said, “For our business, we see opportunities in distressed space, which is looking imminently actionable. It’s a huge place and also the most attractive, and is the highest return business. But in terms of volume, we see the most action in the credit business. It’s far less competitive.”
Pankaj Thapar, chief financial officer at IndoStar Capital Finance Ltd, said, “The pace of each business is obviously very different. Competition is a fact of life, it will never go away. But with more funds and NBFCs (non-banking financial companies) entering the segment, the private debt market will have people focusing on their core strengths.”
But will growing competition lead to undermining of risk in the industry?
“We have seen this cycle before. In India, banks have been predominantly the suppliers of credit capital. But we need to understand that liability risk of banks is fundamentally and will be different from the funds. When you are talking of a fund structure, you have investors taking direct risk. We need both banks and private debt funds in the system. But we do need a relaxed covenant-light lending model,” said Neeraj Gambhir, managing director and head (fixed income) at Nomura India. “A comprehensive credit market where both banks and funds provide a wide spectrum of lending solutions is what is needed.”