Investing in stressed assets more attractive for firms like us: AION MD

AION focuses here on equity buyouts, hybrid capital solutions and investing in the distressed asset space, says Parth Gandhi

AION Capital Partners, an entity formed by ICICI Venture with Apollo Global, has been one of the few private equity (PE) funds which have been able to close an acquisition of a stressed asset under the National Company Law Tribunal, with Indian partners. Parth Gandhi, managing director, talks to Surajeet Das Gupta on strategy, performance and how it chooses investment targets. Edited excerpts:
 
How has your first fund done and when do you plan to raise the second one?
AION’s first fund is an India-focused one, with $825 million in committed capital; if we consider co-investments, it comes to about $1.1 billion. Of these, we have invested over 75 per cent. We are in the process of defining our strategy for the second fund and will decide later this year.

 
We have fully exited from Avantha and Logix, and have had partial exits from a few other investments like Varun Beverages, Mytrah and Mercator. We have returned over $250 mn of capital to our investors.

 
Has the interest in PEs of the Indian market become less than a few years ago? Are your investors more cautious of putting in money in India and in Indian companies?
PE’s interest in India continues to be robust. AION focuses here on equity buyouts, hybrid capital solutions and investing in the distressed asset space. We are seeing a larger proportion of deals emerging in buyouts than before. With the new NCLT guidelines, investing in distressed assets in India has become more attractive for firms such as ours.

 
Hybrid capital was of interest for Indian companies and continues to remain so. Most PE funds in India typically do not hedge their currency exposure. We have pursued a focused hedging strategy and our portfolio of rupee exposure is hedged, which holds us in good stead at times of such volatility. With the differentiated nature of our strategy, we have found investors remain interested in AION’s India strategy.
 
What challenges do you see in the insolvency process? What has been your experience in other markets?
AION is an India-focused fund. We have a large stakeholder in Apollo Global Management, which has very strong understanding of global markets and insolvency processes, a global leader in this space. We have the flexibility to reach out to them for any advice, thought processes or expertise. In India, the process is young and evolving; that is why it is taking time. So far, we have found the government and regulator’s intent to be strong and positive; the process itself has been pretty good. We have just bought Monnet Ispat with our partner, JSW. This was the first large distressed (asset) investment by a PE fund in India.

 
What turnaround strategy are you planning for Monnet?
Monnet is an investment we have made with JSW Steel and our team is working closely with our strategic partner on the strategy.
 
What is your investment plan for the next 28 (insolvent) companies which come up for sale at the NCLT? What would be your strategy?
We evaluate stressed assets of a certain size and are looking at the next 28 companies through a similar lens.
 
Are you open to looking at stressed assets which would come up for sale from (bankruptcy-hit infra major) IL&FS?
As a strategy, we evaluate all stressed assets of a certain size.

 
It is about two years since you bought out Clix Capital. How do you plan to scale up Clix? Will you be raising fresh funds in the company?
We had bought out the commercial lending and leasing business of GE Capital in India. We bought the two NBFCs (non-bank finance corporations) owned by GE — GE Money and GE Capital CIS. The firm currently has a lending book (assets) of over $550 million, with three major lines of business — corporate lending, SME (small and medium enteprise) lending and consumer lending.
 
The lending book of Clix has grown organically. The net NPA (non-performing assets, proportion of advances) is 0.3 per cent. On the new corporate book that we originated after the GE acquisition, we have a very healthy book — zero days of payment delays across the entire corporate book. We have been very focused on managing the asset/liability mismatch (ALM), our liquidity is very strong and we continue to maintain high cash balances. As we raise leverage at Clix, we remain focused on maintaining a positive on ALM gaps.

 
We are currently in the process of getting approvals on more bank funding and are finding in this tough market that there is desire from banks to lend to entities that they consider strong credit. We will raise additional equity opportunistically over the next year or so.
 
AION also bought into Kishore Biyani’s Ryka. Why did you take a bet on physical retailing, rather than on e-commerce?
We look for fundamentally strong companies in retailing, with real assets and a strong customer franchise. Philosophically, we like strong business models, with capable and dynamic promoters.
 
 
What has been your experience with the investment in Varun Beverages, at a time when the soft drink industry is not growing fast and he is the largest Pepsi bottler? Have you exited from the company?

Consumption of carbonated beverages in India is roughly eight ounce bottles per capita per annum. The global consumption is about 100 eight-ounce equivalent bottles per annum. In America, the number reaches 400; in Mexico, it is 800. We believe consumption will grow in India. Varun has full spectrum and a full product portfolio across segments. It also is a high Ebitda (operating earnings) business, with strong return on capital.
 
So, we like the business we have invested in. Though I have stepped out of the board and we sold some of our equity interests that we had converted, we continue to believe in its growth story, which will bring value for its investors. We have exited a majority of our investment with very robust returns. We still hold a small percentage of equity.

 
You have been absent from new-age businesses like e-commerce, auto aggregators, etc. Why?
We look to invest in strong businesses and good promoters. We look for companies where we believe our capital can fix the capital structure and, hence, generate returns. Each specific opportunity will define whether those instruments will be equity or debt or a mix of both. In terms of the new-age businesses in India, these are still maturing. We might look for those in the future but have yet to find an opportunity that fits our strategy.
 
How long do you stay invested and what is the ROI (return on investment) you typically aim for?

We believe you have to be rational about the return you are seeking for the risk you take on. We target the highest possible risk-adjusted return. On every investment, we do deep diligence and spend time in understanding the business and the promoter.
 
On the investment duration, we have a fund with a 10-year life. Most other PE funds have one of five or seven years. Hence, we have the ability to take a longer view in terms of time, if needed. A credit investment will typically have a shorter tenor; an equity investment will have a longer one. In buyout investments like Clix, where we have about 85 per cent stake, we expect to have a longer tenor.

 
Will you be moving more towards taking a controlling interest wherever you invest, as seems to be the trend in PE?
Equity buyouts are an integral part of AION’s strategy. We do look for value buyouts. In fund-one, we have already closed on Clix and Monnet. As the Indian economy matures, I believe we will see more and more buyouts being available. Further, the availability of mature management teams that can step in and manage the buyout will increase.
 
What is your investment strategy in terms of sectors you would concentrate on, and why?
AION focuses on companies that have a good business and require a balance-sheet solution. We have invested in a broad range of industries and will continue to evaluate new opportunities on a deal-by-deal basis