For­eign Hand to Help Out Stressed In­dia Inc Books

Apollo-ICICI Ven­ture JV raises $825 m as PE firms make a new con­tra pitch

The Economic Times - - Front Page - ARI­JIT BAR­MAN

Bat­tling per­cep­tions of ge­o­graph­i­cal risk and buck­ing the usual strat­egy of pro­vid­ing growth cap­i­tal to In­dian businesses, pri­vate eq­uity firms Apollo Global Man­age­ment and home­grown ICICI Ven­ture have man­aged to con­vince large in­ter­na­tional in­vestors, in­clud­ing five sov­er­eign and an equal num­ber of pedi­greed US pen­sion funds, to take among the big­gest con­trar­ian bets on In­dia.

Last week, Aion Cap­i­tal Part­ners, a joint ven­ture be­tween global heavy­weights Apollo and ICICI Ven­ture, one of In­dia’s old­est PE houses and an arm of the largest pri­vate sec­tor lender, raised $825 mil­lion and closed their maiden spe­cial sit­u­a­tions fund. This is amongst the largest In­dia-fo­cused funds raised in re­cent times when fund-rais­ing, espe- cially for lo­cal pri­vate eq­uity in­vest­ments, has be­come ex­ceed­ingly tough.

Ad­di­tion­ally, Aion also man­ages $120 mil­lion of co-in­vested cap­i­tal, tak­ing its to­tal as­sets un­der man­age­ment to $945 mil­lion.

Out of that, Aion has al­ready de­ployed a to­tal $215 mil­lion in Gau­tam Tha­par’s flag­ship Avan­tha Hold­ings and Mum­baibased Jy­oti Struc­tures in var­i­ous debt, eq­uity and struc­tured hy­brid in­stru­ments. This unique flex­i­bil­ity of in­vest­ing across the full cap­i­tal struc­ture and es­pe­cially in debt prod­ucts that meet a com­pany’s short-term fi­nan­cial needs give Aion its edge, ar­gue pri­vate eq­uity pun­dits. Equally sig­nif­i­cant is the fact that Aion’s suc­cess­ful fund-rais­ing marks a fun­da­men­tal change in the In­dian PE mar­ket and could per­haps seed the emer­gence of a new seg­ment al­to­gether.

Tra­di­tion­ally, in­vestors have largely looked at In­dia through the prism of a growth eq­uity mar­ket, whereas this is per­haps the first time they have recog­nised lo­cal en­trepreneurs and cor­po­ra­tions need flex­i­ble long-dated cap­i­tal, which for var­i­ous rea­sons is be­com­ing in­creas­ingly dif­fi­cult to get in this coun­try. “As a fund, Aion is horses for cour­ses at the right time. As we speak, there are enough and more com­pa­nies across In­dia Inc with a skewed cap­i­tal struc­ture and for them spe­cial credit or hy­brid cap­i­tal is the need of the hour,” said Vishakha Mulye, man­ag­ing di­rec­tor and CEO of ICICI Ven­ture.

Sev­eral do­mes­tic com­pa­nies are cur­rently sad­dled with short-term pain trig­gered by the slow­down and des­per­ately need re­cap­i­tal­is­ing. They are find­ing it tough to ser­vice their high lever­age and are only look­ing to con­serve cash. Tra­di­tional providers of cap­i­tal such as banks can­not of­fer them bonds or other long-dated prod­ucts while growth-fund­ing PE sources would shun these op­por­tu­ni­ties, be­ing out­side their tra­di­tional in­vest­ment purview.

Aion’s niche is to pro­vide these stressed bal­ance sheets with long-term, pa­tient cap­i­tal to help sort out the tem­po­rary cash flow dis­lo­ca­tions and re-es- tab­lish their mar­ket pre-em­i­nence. Many such op­por­tu­ni­ties are in cycli­cal in­dus­tries such as cap­i­tal goods, power, ce­ment and iron & steel or in the last leg of project cy­cles and are look­ing for cap­i­tal in sync with cash-flow pro­file — be it in the form of eq­uity or long-tenor debt or a com­bi­na­tion of both. Sud­denly starved of cap­i­tal, even the stock mar­ket has stopped as­crib­ing value to them. That’s where Aion hopes to come in now and fill a vac­uum. His­tor­i­cally and around the globe, Apollo is known for its pref­er­ence for such out-of-favour sec­tors. It ac­quired Lyon­del­lBasell, the chem­i­cals gi­ant that many had writ­ten off for dead be­fore, fend­ing off a ri­val bid by Re­liance In­dus­tries, turned it around and last year sold it at a $10-bil­lion profit, mak­ing it ar­guably the great­est PE buy­out deal ever. Aion’s ap­proach blends per­fectly with Apollo’s global strat­egy as well. Apollo’s me­te­oric rise to the top of the PE rank­ings glob­ally since its be­gin­ning in 1990 was un­de­ni­ably pow­ered by an in­ti­mate un­der­stand­ing of debt, a cru­cial head­start con­sid­er­ing that all bul­ge­bracket buy­out funds now be­lieve this is the key to fu­ture growth. “In In­dia, PE in­vest­ing has been rel­a­tively con­strained and nar­rowly de­fined. It his­tor­i­cally hasn’t had many of the struc­tural ben­e­fits that PEs can ac­cess in the West. We be­lieve Aion is dif­fer­en­ti­ated be­cause it has truly flex­i­ble cap­i­tal and we can take a con­trar­ian and pa­tient ap­proach to­wards in­vest­ing given the long-term na­ture of the fund’s cap­i­tal,” said San­jay Pa­tel, se­nior part­ner and head of in­ter­na­tional pri­vate eq­uity, Apollo Global Man­age­ment. The need for flex­i­ble, hy­brid cap­i­tal in In­dia is sub­stan­tial and still un-

Tra­di­tion­ally, in­vestors have largely looked at In­dia through the prism of a growth eq­uity mar­ket

tapped. Com­pa­nies with high lever­age and bal­ance sheet stress are typ­i­cal tar­gets. Al­ter­na­tively, as in Jy­oti Struc­tures or Avan­tha, it could be a case of tem­po­rary dis­lo­ca­tion. While the for­mer had un­fin­ished capex in its US plants and sud­denly faced the dou­ble whammy of a power sec­tor im­plo­sion in In­dia, Avan­tha needed longterm funds to re­cap­i­talise the hold­ing com­pany and cut debt. Then there could be gen­uinely spe­cial sit­u­a­tions where Aion can bankroll a pro­moter with fund­ing so­lu­tions for the hold­ing com­pany or help in ac­qui­si­tion fi­nanc­ing, which do­mes­tic banks are pro­hib­ited from.

This is es­pe­cially strate­gic as tra­di­tional sources of fund­ing are re­garded as get­ting over-reg­u­lated. With non-per­form­ing as­sets (NPAs) on the rise and wor­ri­some ex­po­sures in cer­tain cashguz­zling core sec­tors such as power and in­fra­struc­ture, banks them­selves have a stretched bal­ance sheet and are be­ing forced to tighten the screws. Many global play­ers have shrunk their bal­ance sheet ex­po­sure to In­dia and are be­com­ing less flex­i­ble when struc­tur­ing in­vest­ments into In­dia. Non-bank­ing fi­nance com­pa­nies (NBFCs), though suc­cess­ful in the mid-seg­ment, do not have the size, cost-ef­fec­tive­ness or global reach to be long-term cap­i­tal providers and part­ners for man­age­ment. The pub­lic mar­kets have been shal­low and fickle — and typ­i­cally only avail­able to a few se­lect com­pa­nies. Apollo and ICICI are not the only ones who have spotted this op­por­tu­nity. KKR has been try­ing to com­pete on the credit side of the busi­ness with their NBFC, hav­ing in­vested over $1 bil­lion in In­dia till date. Gold­man Sachs part­nered with Baer Cap­i­tal and Ever­stone to es­tab­lish In­dostar in 2010 whereas Ajay Re­lan’s CX Part­ners was also on the road to raise a mez­za­nine fund. But rarely has so much money been raised by a sin­gle en­tity ex­clu­sively for spe­cial sit­u­a­tions.

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.