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Credit investors see more opportunities in growth capital demand

(From left) Amit Agarwal, head-stressed asset investments, Edelweiss Alternative Asset Advisors; Kapil Singhal, managing partner (private credit), True North; Ameya Khandge, partner, Trilegal; and Eshwar Karra, CEO, Kotak Special Situations Fund.Premium
(From left) Amit Agarwal, head-stressed asset investments, Edelweiss Alternative Asset Advisors; Kapil Singhal, managing partner (private credit), True North; Ameya Khandge, partner, Trilegal; and Eshwar Karra, CEO, Kotak Special Situations Fund.

  • According to panellists, while there has been a clean-up of stressed assets, the expected revival in the private capex cycle would mean greater demand for growth capital and access to areas where traditional financiers do not tread

Opportunities in India’s credit market are gradually moving toward growth assets from distressed assets, panellists said at the Mint India Investment Summit 2022.

According to them, while there has been a cleanup of stressed assets, the expected revival in the private capex cycle would mean greater demand for growth capital and access to areas where traditional financiers do not tread. This, panellists said, presents an immense opportunity for private credit providers.

“We raised a billion dollars in 2019 largely to address the distressed and special situations landscape, which at that time was pretty robust. As we went along, we saw either a large part of those NPAs have been resolved through strategic buyouts or through other financiers who have come in and thanks to some delays in the IBC process, the market had soon changed," said Eshwar Karra, chief executive of Kotak Special Situations Fund.

Karra said the fund has deployed almost 90% of its total corpus and is seeing that the nature of transactions is more in growth and development rather than in distressed assets.

“We are on the road to raise our next fund and we are looking at a strategic situation fund rather than a special situations fund. That is the way the market is going right now," added Karra.

According to Indranil Ghosh, managing director and India head of Cerberus Capital, interest in the Indian market still continues to be fairly strong. “In fact, if anything, a lot of special situations investors like us will now slowly start doing growth credit as well as low single-digit higher quality financing," said Ghosh.

Global alternative asset managers who are trying to grow their assets under management, have realized that while special situations are a great place to be in, in terms of internal rate of return (IRR), opportunities are few and far between.

“Alternatives like us will start doing financing for both growth and opportunities where the traditional banking sector is restricted from providing financing or has to form a consortium to fund a big project," added Ghosh.

Others pointed out that a few things that have definitely changed for the good and that is why investors continue to be bullish on Indian credit. While there is a lot of criticism of the Insolvency and Bankruptcy Code (IBC), it has given comfort to domestic and international investors to have a basic downside protection.

“IBC has put the fear of God in the minds of Indian promoters and while it still has a long way to go, it is one of the most seminal shifts to happen in India," said Kapil Singhal, managing partner, True North.

Singhal said that close to 3 trillion of supply in the private credit market has been disrupted on the performing credit side.

“The total supply is less than 30,000 crore. Will love to play all the categories going forward but we believe performing credit market is set in the right space, starting with refinancing. As the capex cycle picks up, there will be a lot of growth financing as well," added Singhal.

Amit Agarwal, head of distressed assets at Edelweiss Alternative Asset Advisors said that the mainstay of bank credit growth has been retail and if credit has to grow exponentially, then a large part of that will have to come from private credit.

“The NBFC sector will only finance a limited amount of flexible capital that we need. On the private credit side, yields will continue to remain a concern because the private credit markets need a 400-500 basis point spread from where the banking credit comes in even on the performing side. Obviously for special situations, the yields are higher," said Agarwal.

Ameya Khandge, a partner at Trilegal said that there was a time when despite Sarfaesi and other laws, borrowers had the upper hand considering the kind of litigation timelines people were facing. “There are two or three things that have come into this confluence. One is of course the fact of IBC where lenders are in the drivers’ seat and the rules of the game have changed," said Khandge.

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ABOUT THE AUTHOR

Shayan Ghosh

Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks. He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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