Foreign PE funds and JVs to have a go at next round of IBC assets

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Leading global private equity (PE) funds and their joint ventures (JVs) are set to bid for the next round of 28 stressed assets that will be on the block through the IBC (Insolvency and Bankruptcy Code) process.

The big global players have had limited success in the first round of sale of 12 large stressed assets, with only AION, a JV between Apollo Global Management and ICICI Venture, picking up Monnet Ispat in a consortium with JSW.

The other big global players (KKR had looked at Monnet), despite having an interest, left the game mostly to strategic players. Bain-Piramal, for instance, was initially interested in both Bhushan Power and Bhushan Steel with a partner. And Dalmia Bharat, backed by Bain-Piramal, is in contest with Ultratech for Binani Cement in the insolvency courts.

PE funds point out that the 28 firms, which have revenues ranging from Rs 200 billion to Rs 400 billion, have a debt of Rs 200-500 billion each. They estimate the firms together will require an infusion of $15 billion (Rs 1.1 trillion) in a combination of equity and debt.

On average each company will require more than $100 million of equity infusion to begin with. About $3 billion will come from direct equity infusion, and the rest from debt. 

Says Shantanu Nalavadi, managing director of India Resurgence Asset Management Business, the JV between Bain Capital Credit and Piramal Enterprises: “We have been active in bidding for the assets in the IBC and will participate in the next list of 28 companies. We continue to remain focused on bidding for only those assets that have a turnaround potential and in sectors that have a strong growth story, supported by an underlying strong demand forecast.”

According to sources in KKR, the company will look at controlling equity in potential assets in the next round so that it can leverage its expertise to turn around stressed companies. They could look at keeping the promoters as a minority equity holder. 

PE funds like AION, for instance, have been focused on sectors like auto components, pharma and metals, and have had success in the first round in metals with Monnet. It is expected that it will continue to pursue the same areas in round two also. AION had shown an interest in auto component companies like Amtek Auto but did not make a bid. 

Global PE funds admit they face challenges vis-a-vis strategic players, which limits their ability to bid too high. “We work on return on capital employed (RoCE) of 20 per cent, which is much lower than what strategic companies work on, which is 12-15 per cent. Therefore, we cannot bid too aggressively and prefer to move out if strategic investors are involved. JVs between global players and Indian partners have a lower RoCE target.” 

There are different models PE funds are considering. One is to tie up with a local partner with expertise in a sector and bid as a consortium (like AION did with JSW). The second is to have different partners in the same sector who have specialised expertise in a niche area. Thirdly, it could go on its own because it might find value that their potential partners might not. The fourth is to rope in the promoter as a minority stakeholder because he has the knowledge to run the show.

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