Markets with Bertie: A new source may fund the next round of private capex in India
- Corporates may prefer to borrow private credit, and not from banks or bond markets, when the next private capex cycle kicks off.
Over the years, Bertie has curated a mental list of Original Thinkers (OTs) in the finance world. In an industry that thrives on regurgitating second-hand wisdom, the OTs are precious. Periodically, Bertie seeks time from them for a ‘no agenda’ meeting; a relaxed, free-wheeling conversation where neither party is trying to impress or sell anything to the other. Looking back at these meetings, the deep impact they have had on his thinking—not just about finance and investing but life in general—is unmistakable.
Bertie caught up with one such OT last week; let’s call him Ash. They went to the same red-bricked alma mater but many years apart. Ash has built a formidable financial services firm from scratch and although pushing sixty, remains as sharp and fit as ever. After talking about their respective extra-curricular pursuits, the conversation veered towards the economy and from thereon to the lack of growth in private capital spending. When probed about the reason for this, Ash had a straight answer. “Banks cannot fund private capital expenditure.” That statement surprised Bertie who had been toying with the idea of buying shares in corporate lenders in anticipation of the much-awaited turn in private capex.
Bertie waited for Ash to elaborate. “Multiple issues Bert!” he started. Strict banking regulation that included higher risk weights, capital requirements and single borrower limits were all cited as impediments. The biggest issue, Ash thought, was asset-liability mismatch on the banks’ balance sheets. “Very hard to raise long-duration money in size in India to fund these projects. So, most corporate lending on bank balance sheets is just working capital,” he explained.
“So how does the next cycle get funded?” Bertie asked. “Private credit,” said Ash without hesitation. He went on to enumerate the advantages that private credit has over bank lending. For starters, they do not have most of the aforesaid regulatory encumbrances plus the added advantage of innovative deal structuring and almost permanent capital due to long fund tenures and lock-ins. “That takes care of the asset-liability duration.” Ash said. “So, when the private capex cycle picks up, corporates will prefer to borrow from the funds and not banks or bond markets.” Bertie now wore a thoughtful expression.” Look for an alternative assets manager, Bert; not a corporate lender. The alts juggernaut is soon coming to India,” he signed off.
Granny dearest
After each Budget, Bertie’s venerable private bank holds a roundtable discussion about changes in legislation that would affect the investment plans of the wealthy. Our man normally gives these gatherings a miss as they quickly morph into marketing pitches for whatever new-fangled instrument the bank is selling. There was a time when clients could sample some delectable wines at these meetings but ever since the headquarters suffered near-fatal losses on a real estate exposure, the cost cuts, Bertie was told, were brutal. That fact made it even more easy for Bertie to skip the event.
“Come na!” Bertie’s winsome private banker Natasha said in her lilting voice when Bertie politely regretted the invite. “So many clients want to hear about your market view.” Now Bertie may be a logical thinker but he is as susceptible to flattery as the next fund manager and so, despite all his reservations, he found himself black-suited in the large conference room of the private bank.
He gathered that the crux of the problem that the bank was trying to solve was how to generate fixed-income like returns with equity-like taxation. This was important for the gathered crowd as everyone there was taxed at the highest slab rate, which meant that even an 8% interest on any instrument, dwindled to less than 5% after paying taxes.
The head of products at the bank was recommending arbitrage funds that promised steady returns but were taxed as capital gains. He was also peddling a whole host of hybrid products that threw an arbitrage fund in the mix, to take advantage of lower taxation. Bertie realized that the lack of tax-efficient fixed income product for the ultra-rich was a real problem but he also thought that the solution to this, at least for the masses, was invented many decades ago. It was called ‘Granny’.
Senior citizens not only get a higher rate of interest on most fixed deposits, with the changes in tax slabs, the amount of tax-free interest income for them has also increased. Most Indian households invest in fixed deposits under the name of senior citizens in their family, which is why it is not surprising that almost 50% of the banking system’s fixed deposits are attributable to senior citizens.
As the product presentation wound up, Bertie made a mental note of visiting his grandmother soon. She had now become even more valuable.
Bertie is a Mumbai-based fund manager whose compliance department wishes him to cough twice before speaking and then decide not to say it after all.
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