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While there is nothing new about the opportunity for distressed assets funds (DAFs) in India, there is clear traction now, with about $1.62 billion being raised this year by domestic and global players.
In January, the Piramal Group floated the largest $1-billion DAF in association with Nirmal Gangwal-founded turnaround company Brescon Corporate Advisors. This was followed by global giants CPPIB and JC Flowers tying up with the Kotak Mahindra Group and Ambit Holdings to launch $525-million and $100-million funds this month, respectively. Banking sources say global alternative investment funds WL Ross & Corp and Oaktree Capital Management are also scouting for opportunities.
Indian banks had Rs 65-70 lakh-crore ($ 1-1.25 trillion) advances at the end of September last year. Of this, 11-14 per cent is estimated to be stressed assets, which have been either restructured or declared non-performing. This makes it a $100-150 billion opportunity for DAFs or alternative investment funds that invest in these stressed assets.
"For stressed companies, it is not an opportune time to tap the capital markets. Banks are not willing to provide liquidity and most promoters are not in a position to infuse capital," says Dinkar Venkatasubramanian, partner, transaction advisory services, EY. "There is certainly a dire need for capital and it presents the right opportunity for these investors to come in."
These funds were always interested but largely held back because of three reasons, which are set to change. First, there has been a lack of a regulatory framework to protect their interests. This is expected to be addressed now by the proposed bankruptcy law. Second, there was the need to control assets - which should be addressed via change of management post Strategic Debt Restructuring (SDR). Finally, the new investors were apprehensive of being saddled with unsustainable debt. This will change now with lenders willing to look at an appropriate capital structure to enable revival.
"While none of these are proven on the ground, adequate progress is being made by the RBI, the government and the lenders to provide more confidence to the investors that their concerns will be addressed. This has created interest among the global players," says Venkatasubramanian.
The RBI has given banks March 2017 deadline to clean up the books. Also, the regulator has strengthened various tools, including introducing the SDR scheme. Besides, the government has proposed 100 per cent foreign direct investment in asset reconstruction companies as well as in security receipts that they issue to raise capital after taking charge of stressed assets. These are real drivers.
The new players ready to get into this with their money and effort agree with this. "A lot of these firms require change of ownership to build credibility and become bankable. This is where we can play a huge role," says Eshwar Karra, CEO, Phoenix ARC, an affiliate of Kotak Mahindra Group that will work with the fund that the Group has committed, along with the Canada Pension Plan Investment Board (CPPIB).
"This is a flexible fund and we will look to invest $30-40 million per transaction. In certain instances, we could get strategic investors to invest along with us. With our expertise in the distressed market, our intension is to rehabilitate these firms," says Karra explaining the strategy.
The plan for Ambit Holdings' joint venture with JC Flower is no different. "We are not looking for a quick in-and-out," says Rahul Gupta, joint chief executive officer of Ambit Holdings, which is targeting at distressed mid-cap companies with sustainable debt structures that can be revived.
"We will be using a combination of change in management and financial management tools such as providing additional working capital to turn these around," says Gupta.
