Emerging markets special: Private equity tackles India’s bad debt

Blackstone is the latest global private equity manager to tap opportunities in India’s distressed assets space, investing about $150 million for a stake in International Asset Reconstruction Company in September.

Bain Capital Credit raised more than half of its $1 billion target for its first Asia-focused special situations fund in September. Sarit Chopra, managing director of Bain Capital Credit, tells Private Equity International the firm sees significant dealflow in India, with several large businesses that are inherently viable or have good assets that can be monetised. It first entered the market in August 2016, setting up a $1 billion joint venture with Piramal Enterprises to snap up indebted companies.

Chopra adds that the government and the Reserve Bank of India have introduced measures in the past year that he describes as a “a real catalyst for triggering investment opportunities for specialist investors”.

It’s no surprise global firms are bullish on the bad debt market. India’s Ministry of Finance estimated $200 billion of distressed or credit-impaired assets as of December 2016.

The government enacted a new bankruptcy and insolvency code as well as introduced major amendments to the Debt Recovery Act and the SARFAESI Act, which allows banks and other financial institutions to auction properties to recover loans.

Another important change has been the government’s approval of 100 percent foreign direct investment in asset reconstruction companies. Mintoo Bhandari, a senior partner at Apollo Management, says: “In the past, a firm like ourselves would have to depend on other parties to pull together to transact, which would cause challenges in alignment, cost and speed.”

The RBI has increased the capitalisation requirements of ARCs, from 2 million rupees ($310,000; €260,000) to 100 million rupees. “It’s a 50x increase in minimum capitalisation, which means they want larger, more serious, experienced players in the space. They are making a real move towards ensuring professionalism and scale,” Bhandari explains.

Ganesh Rao, a partner at AZB & Partners, cautions that ARCs have not been entirely successful in undertaking asset reconstruction because buying debt has been expensive. Significant co-operation is also needed from the company for the ARC to successfully turn around a business.

Chopra adds: “Investing in the distressed asset space in India is not without its challenges. Local market dynamics and stakeholder management – not just with the company, but with creditors, banks, the local government and employee groups – are critical factors for success.”