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Private equity (PE) firms in India are making larger bets with borrowed money, stoking demand for acquisition financing amid low-interest rates and a world awash with cash.

PE firms use debt in addition to equity capital to make large acquisitions, reducing their overall cost of capital and improving their potential returns while also allowing them to make larger acquisitions.

Mint reported earlier this month that Carlyle is looking to raise as much as $1 billion in debt financing to fund its takeover bid of Hexaware Technologies, while in June, Blackstone raised a similar amount to fund its acquisition of Mphasis Ltd.

“Between November and March, there was a lot of demand for acquisition financing in the unlisted space because while listed valuations had run up significantly, valuation expectations on the unlisted side were still reasonable. But, after March, that changed, and even on the unlisted side, promoters started seeking valuation multiples comparable to listed peers," said Shantanu Sahai, managing director and head of debt at Nomura.

According to Sahai, this trend has resulted in a significant shift in the debt market.

“While earlier acquisition financing was underwritten by banks like us and placed in the c in Taiwan, EMEA, Australian and Southeast Asian banks. Now, these higher levels of leverage, coupled with additional flexibilities sought by sponsors (PE funds) such as incremental covenant headroom’s, cash flow deferrals, higher operating leverage headroom’s and higher subordination render commercial banks unable or unwilling to subscribe to this paper per their own risk/investment policies. Hence, the entire selling universe of such types of loans has shifted from commercial banks to credit funds and other institutional investor participants," he said.

This is a new product on the block called “unitranche", and currently, very few banks are servicing this need of the market, Sahai said.

“While on the face of it, this looks like a product that is just a little bit different from the usual acquisition and leveraged finance product in the sense that maybe the leverage is a little more, covenants are looser, yields are higher, the tenor is longer, etc., but the consequence of that is a product that is not capable of being sold in the commercial bank space. So, it needs a whole new investor base to sell it," he said.

Funding acquisition 
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Funding acquisition 

This is an institutionalization of the acquisition and leveraged finance space that has happened in a widespread way in the past three to four months and has happened for the first time in India, he added.

Nomura expects the need for acquisition financing to grow strongly in the next 12-18 months on account of both financial sponsors deploying more capital into the country as well as consolidation themes across sectors.

In line with the growing buyout activity in the Indian market, the Japanese bank plans to aggressively grow its lending business in India.

“We have closed six deals in the last one quarter, and we have a pipeline of close to 17 more deals for this year. We plan to double our balance sheet in the next 12-18 months," Sahai said.

“Our balance sheet deployment and revenue CAGR over the last five years is more than 100%. And despite this aggressive growth, the total aggregate cumulative delinquency, which either delays or defaults over this entire period, is nil," he added.

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