KKR signs 2 debt deals, while ICICI Ventures’ mezzanine funds invest in 3 deals.
Private equity (PE) firms operating in India are putting fingers in the debt pie for the first time. Global funds, with mandates for both equity and debt, have started extending debt to Indian companies.
The latest to do so is Kohlberg Kravis Roberts & Company (KKR) private equity. The US-based PE firm has started investing in debt from its special situations fund and is lending from its global non-bank financing arm (NBFC). ICICI Venture Fund and SBI Macquarie are also using mezzanine funds for extending corporate debt.
The advantage is that PE funds can follow this up with an equity funding. By then, they can raise the company’s valuation and build a better relationship with the promoters.
Explains Peter McKillop, director of global communication, KKR, “In the past, we could walk away if deals did not fit our equity parameters. But then, we realised we were losing a lot of potential relationship-building. We do have certain kind of mandate from certain clients who are looking for debt.” He added one investment had come from one of their special situation funds.
KKR has invested in two debt deals in India — JSW Steel and Analjit Singh’s investment firm.
KKR has invested Rs 650 crore in JSW Steel from its NBFC Multiflow Financial Services Private Ltd. The deal is in the form of structured sponsored finance, which is a mixture of fixed-income payments, equity and cash. The company will start repaying the loan after three years.
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Similarly, it has invested Rs 550 crore in Analjit Singh’s privately-held investment firms.
There are variuos structures available for mezzanine funding. ICICI Ventures has made three investments from its $51-million mezzanine funds.
The returns vary from 12 per cent to 20 per cent, with an option of an equity upside.
“Companies resort to debt, as it is cheaper than equity, where expectations are more like 25 per cent. Also, there is no dilution of promoters’ shareholding,” said Vikram Hosangady, executive director, KPMG. He added returns were in higher teens and still offered a good arbitrage opportunity for these debt funds.
Investors with a low risk profile favour debt over equity. McKillop said a fair number of investors, who already had exposure to private equity, were showing interest in debt or mezzanine kind of investments.
PE players see opportunity in sectors where banks do not lend due to regulatory reasons.
“Banks are tightly regulated by the Reserve Bank of India. Hence, they find lending to certain sectors like real estate difficult. This creates a market for PE players, as they can lend to Tier-II companies,” said Sumir Chadha, managing partner, Sequoia Capital.
While KKR has entered the debt market, another PE firm Carlyle does not see any market opportunity due to investment limits on the ticket size.
“We have a leverage debt fund globally from which we invest in debt. But, we do not see the market for debt in India as investment limits are small. So, we focus only on equity,” said Carlyle India Advisors Private Equity Managing Director Rajeev Gupta.
To invest in debt, PE firms are launching distressed asset funds. “Many PE players are raising distressed funds as they see an opportunity in debt. Companies get money at a low cost when a PE invests in debt. Also, a number of funds have lent to companies through their NBFC arms,” said a senior executive at an investment bank.