PE firms mine distressed assets in India

Global PE firms are swooping in on India’s $120bn distressed assets market, encouraged by regulatory changes allowing for more foreign investment in the sector.

Global private equity investors are partnering with local players to swoop in on troubled businesses in India as the nation’s banks grapple with about $120 billion of distressed assets – some 11.5 percent of gross advances – amid regulatory changes designed to boost available sources of capital for the sector.

Earlier this week, Bain Capital Credit, an affiliate of Bain Capital, and Mumbai-based Piramal Enterprises said they were launching a $1 billion distressed asset investment platform. The platform’s mandate is to invest directly in debt-laden businesses or to acquire the debt of such businesses for restructuring. Target sectors include infrastructure – one of the largest industry sources of stressed loans in India – as well as consumer and retail, the firms said in a statement.

In July, Canada’s Brookfield Asset Management, which focuses on property and renewable energy, and the State Bank of India announced plans to launch a $1 billion distressed asset management fund.

In March this year, New York-based JC Flowers Asset Management teamed up with Indian investment bank Ambit Holdings to set up Ambit Flowers Asset Reconstruction, an asset reconstruction company (ARC) that would buy between $20 million to $50 million of bad loans from lenders and work on revitalising the business. The two firms are also reportedly looking to raise a $100 million distressed fund alongside the ARC joint venture.

Also in March, Canada Pension Plan Investment Board said it would invest up to $450 million to restructure and turnaround stressed assets in India. The Toronto-headquartered fund partnered with financial services conglomerate Kotak Mahindra Group to extend up to $525 million in credit financing.

Other global investors active in the sector include private equity heavyweight KKR, Hong Kong-based SSG Capital, and the International Finance Corporation, which have all recently acquired stakes in ARCs.

One of the early players in this space is US-based Apollo Global Management, which partnered with Mumbai-based ICICI Venture Funds Management in 2014, raising $825 million to invest in special situation opportunities in India. Investments from the fund include GE Capital India’s financial services business as well as Varun Beverages, a bottling and distribution franchisee of PepsiCo India.

The increase in overseas investment is driven in part by regulatory changes. The Reserve Bank of India, which carried out an extensive asset quality review to inspect large numbers of bank loans between August and November of 2015, is requiring Indian banks to declare non-performing assets and clean up their balance sheets by March 2017, a move expected to boost the pipeline for potential deals in the distressed asset market. Also, the 2016-2017 Union Budget raised the limit on foreign investment in ARCs to 100 percent, which should attract more distressed funds to the sector. Already, at least six to eight players are estimated to have applied for a licence from the RBI to operate as an ARC, according to a July 2016 EY report

And the market for troubled assets in India looks set to grow. Gross non-performing assets or NPAs are forecast to rise to 5.9 percent of total advances in 2016, up from 4.4 percent a year ago, according to data cited by the EY report. The report attributes the increase in NPAs to several factors, including corporate reliance on excessive leverage on loans made between 2009 and 2011 to capital-intensive industries such as infrastructure. Following an economic slowdown and weakening corporate demand post 2011, infrastructure investments such as power generation and distribution were adversely affected. Infrastructure is responsible for some 30 percent of stressed loans, “with a significant portion emanating from the power sector,” the EY report notes. Other capital-intensive sectors holding substantial amounts of distressed assets include iron and steel, textiles, aviation, and mining.

As India’s central bank relaxes guidelines for lenders restructuring large loans, and the new bankruptcy law forces companies to speed up bankruptcy proceedings, expect to see more cash-flush funds mining for stressed assets in India in the coming months.