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Anglo-South African bank Investec expects the opportunity in leveraged buy-out (LBO) to grow significantly in India as the private equity (PE) market deepens and PE funds look to deploy record sums of capital they have raised.

“We have been associated with the Indian LBO asset class since its effective inception in FY2013-14. We have been underwriting leveraged buy-outs for several global, Asian and home-grown PE funds investing in India, and enjoy a very healthy market share in this space. We will continue to grow this practice alongside our corporate credit business as we believe this asset class also is poised for major growth in the coming years," Piyush Gupta, head of private credit at Investec India said in an interview.

Gupta outlined several reasons that are pushing the growth of this lending business in India.

“The PE deal flow continues to increase year-on-year and within that, the share of buy-outs as well as the share of $100 million-plus deals is increasing by the year, and PE fundraising has been strong over the last few years, and there is a significant amount of dry powder that is going to be put to work. Leverage is now increasingly an integral part of deal-making considerations for buy-out PE firms, as sale processes are increasingly becoming more competitive," he said.

“All these trends mean a significant uptick can be expected in leveraged buy-out financing volumes in India in the coming years as also increasingly bigger tickets being underwritten. We also expect the asset class to evolve further and a deeper syndication market to develop," he said.

Already, the LBO financing market in India is seeing some major developments driven by buyouts led by foreign private equity funds. Global private equity giant Blackstone is currently raising over $1 billion (about 7,443 crore) in LBO financing for its acquisition of IT services firm Mphasis Ltd, the Economic Times reported earlier this month.

Investec is also looking to beef up its private credit lending practice in India.

“Investec has been underwriting mid-market performing private credit in India since 2013. We underwrite both rupee and foreign currency financings. We recently (received) the NBFC and AIF licences, and are in the process of operationalizing the same. Given the significant opportunity that presents itself in this segment, we are now looking to accordingly scale up and also seeking third party capital. In the next three-five years, we expect to speak for a 5,000-crore-plus credit investment book across rupee and foreign currency platforms," Gupta said.

The bank has underwritten over 8,000 crore of onshore and offshore private financing towards mid-market businesses. Investec’s private credit loan book in India is largely sector-agnostic across a diverse range of businesses in the manufacturing and services sectors, but completely avoids sectors such as real estate and sectors or business models which require or are prone to high leverage.

Investec believes the private credit space in India offers a large opportunity as it is still underserved, especially after the crisis at Infrastructure Leasing and Financial Services Ltd (IL&FS) led to the exit of many NBFCs from this business.

“Post the IL&FS liquidity shock, several of the wholesale NBFCs retracted from wholesale mid-market lending space. The segment continues to remain under-banked, even though AAAs and large-caps are enjoying very substantial spread compression and more than ample availability of liquidity. However, the demand for private credit and flexible debt capital solutions remains strong as M&A, stake consolidation, refinancing, bridge financing needs in the segment cannot be serviced by traditional providers of debt capital.The segment offers much superior risk-adjusted returns as also a structural medium to long-term opportunity to scale up," Gupta said.

While NBFCs may have receded from the private credit business, many investment firms have chalked up plans to enter the space, both domestic and foreign investors. Still, Gupta believes that the supply of capital lags demand. “Being among the first movers...we believe we are uniquely positioned to take advantage of these dynamics," Gupta said.


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