Private equity players see new business opportunities in post-Covid world

Private equity (PE) players are seeing a growing business opportunity post Covid-19 in providing long-term credit lines to Indian companies, with banks and non-banking financial companies (NBFCs) reluctant to offer loans.
 

Currently, the PE exposure in credit is limited and constitutes less than a 2 per cent share of the overall credit offered to industry. Only a few players such as KKR, AION Capital, SSG, and Edelweiss offer the product.
 

“The current situation could open up significant opportunities for private credit, essentially long-term credit to strong corporates to meet their requirements,” said Parth Gandhi, senior partner and MD, AION Capital.
 

Private equity players said their research had shown that the PE share after Covid-19 could go up to 8-10 per cent. NBFCs, for instance, have a 20-25 per cent share of the overall credit basket. Consequently, even though PE players will charge higher interest rates, many promoters are game, as many NBFCs themselves are in trouble.

PE funds also see other fundamental changes after the epidemic: Strategic investors (companies) will mostly pull out of the merger and acquisition (M&A) space to preserve cash, regulators will come out with more innovative financing instruments to hedge their risks while investing, and the new growth opportunities to invest in will be enabled by technology.
 

Renuka Ramnath, founder MD and CEO of Multiples Alternative Asset Management, said: “I don’t see foreign strategic investors buying a company as their India entry strategy now. Our domestic strategic investors will also focus on protecting their business as capital availability is limited.”
 

However, Ramnath believes there might be some share swap deals by strategic investors but that too is six months down the line.

It’s a trend which even companies discern. A top airline executive said: “Of course some airlines might go under but we don’t see demand getting back to normal before 10-12 months. So there is no point of buying and consolidating. We would  rather let it die and preserve cash. That is a cheaper way to consolidate”.
 

Ramnath says that exceptional situations like the coronavirus pandemic will require more innovative products for financing which hedges their risks.
 

Talks are on with regulators to make them happen, such as the introduction of a special preference share which would be based on a two-week moving average price of the share so that one can come to a more realistic valuation. Or the deadline for warrants, which can currently be converted to shares within 18 months to be extended to between three to five years.

Depending on their size, PE funds see different opportunities.  Bala Deshpande, MD of MegaDelta Capital Advisors, a mid-sized PE fund, said it sees huge opportunities in tech-enabled firms. “There are opportunities in preventive and mental health and in  vaccine firms. However, areas like fashion retail might already be over-serviced,” said Deshpande.

Yet many global large PE funds which invest in India say India is at a disadvantage over other countries in many respects and see no new deal in 6-12 months, with the exception of those already in the pipeline.

The key reason is that fund managers exploring various options to invest across the world expect India’s path to recovery to be slower than other competing countries which, unlike India, have put in a stimulus package for industry and have a clear strategy.

Another reason is that Indian promoters ae holding on to their pre Covid-19 valuations. “In real estate, despite the expected slide, merchant bankers offer us deals on the same valuation. We will wait for 4-6 months for them to come down as we are not in a hurry at all,” said an executive with a Canadian-based PE fund, which is in the annuity business.
 

Finally, many of the growth areas are in businesses which don’t have scale for the big boys to put in money. A top global PE fund CEO said minimum ticket sizes for global funds even to  consider are between $300-$500 million and the firms in, say, artificial intelligence, do not have this size so their scope is limited to firms backed by assets.