Bulge bracket PEs join prospective bidders for slice of ‘distressed’ pie

Mumbai: An increasing number of deep pocket private equity funds are teaming up with smaller companies to bid for distressed assets in the Indian market.

The mounting debt pile and bad loans have seen a fire sale in the India Inc. where a lot of companies or assets are now up for sale, offering a huge opportunity for private equity funds to invest in the $210-billion stressed asset opportunity in India.

Recently, TPG Capital, one of the world’s biggest PE funds, teamed up with Delta Airlines to possibly bid for troubled Indian full-service airline Jet Airways. Before that, India’s government-backed infrastructure fund NIIF teamed up with Canadian fund Roadis to bid for Jet Airways, news reports said.

Significant headway has been made with Indian corporates tying up with PE players either through joint ventures between corporates and PE players to set up distressed asset funds or via partnerships formed to bid for a specific opportunity jointly.

Piramal Enterprises and Bain Capital’s India Resurgence Fund teamed up with Dalmia Cement to bid for Binani Cement. ICICI Venture and Apollo Group’s JV Aion had backed JSW Steel when they bid and won Monnet Ispat’s business. Similarly, SSG Capital had backed Synergy Metals and Mines to bid for a few assets in the metals and mining sector, home grown PE fund True North had joined hands with Ramco Cement to bid for Binani Cement.

Over the last two years, as India’s bad loan problem came to the fore, PE players have raised an estimated $4.5 billion, according to an internal analysis by Edelweiss Securities.

“In order to bid for distressed assets with conviction, the need to partner with Indian corporates operating in the same space will definitely arise,” said Gopal Agarwal, co-head, Investment Banking, Edelweiss Securities.

“Therefore, the formidable combination of PE players armed with a war chest of funds raised globally at minimal borrowing costs coupled with the on-ground efficacy of the Indian corporates can potentially become a knight in shining armour for many distressed assets in the country,” Agarwal added.

Globally, in developed markets, investment in distressed assets is a big opportunity where global funds can buy into troubled, unhealthy companies and turn them around. They ride the growth wave back from the bottom and sell it at a premium, making profits. The hypothesis is that once the problem of debt is resolved and with some financial reengineering a business can be turned around.

“There are certain good assets that are possibly under stress due to high leverage. Once the debt problem is resolved, and fresh equity is infused into the company, the business has a possibility of a sharp turnaround,” said an India head of a global PE fund.

Global investors have also invested in traditional asset reconstruction companies to buy bad debt from banks. More than half a dozen ARCs have seen global investors rushing to invest more than $1.3 billion in the sector in the last three to four years.

ICICI Bank has a joint venture with Aion Capital, JM Financial ARC is backed by Valiant Capital, SBI ARC has a joint venture with Brookefield Capital, ARCIL, one of the oldest ARCs in the country, is backed by Singapore’s GIC, Ankar Capital and Africa’s FirstRand Group. IARC is backed by PE fund KKR and Sabre Capital, Pegasus ARC by DE Shaw and Deutsche Bank and Encore ARC by IFC and ADV Partners.

The government has very recently cleared seven amendments on insolvency law and proceedings, a highlight of which is the extension of the 270-day resolution deadline to 330 days. With the culmination of all these factors and the IBC framework becoming more robust along the way, the interest from PE players will only continue to increase, said fund managers.

PE funds are not alone. There are several global hedge funds trying to partner ARCs and put in competitive bids for the companies that have been dragged to the bankruptcy court by the lenders.

As per the industry estimates, global hedge funds managing more than $100 billion of assets globally such as David Kempner Capital, Deutsche Bank, King Street, Varde Partners and SSG Capital have rushed in to capitalise on the opportunity bankruptcy cases offer to acquire marquee companies reeling under a huge debt pile.