Foreign Hand to Help Out Stressed India Inc Books
Apollo-ICICI Venture JV raises $825 m as PE firms make a new contra pitch
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.