Private Equity funds ready war chest to help firms skip IBC route

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Private equity (PE) funds estimate that in the next 18-24 months, Indian conglomerates will require over $100 billion in equity infusion because they are already reeling from debt, which is set to become non- performing loans. 

They are scouting around to sell their non-core businesses so that they can avoid turning to the Insolvency and Bankruptcy Code (IBC).  PE funds also believe that even if banks write off more than half of the $150 billion non-performing loans currently on their books, someone will need to replace the debt with equity to bring the companies back in the black. 

That money, they say, will come in a big way from PE funds which are building their war chests to grab a part of this big opportunity. In the last two years, PE funds have poured in over $60 billion in India, but the new opportunity is over double the size of what they have invested. 

Reflecting the mood of the industry, Amit Chandra, chairman of Bain Capital, one of the leading funds, said: “A lot of promoters are de-leveraging due to the significant tightening of lending norms for mutual funds, banks, and a major liquidity squeeze. In this context, private equity and strategic investors have a major role to play in bringing in long-term capital.” 

Chandra argues that, as strategic investors move more slowly, have home market compulsions, and strategic priorities, PE funds could have a ‘big edge in many situations’.   

That is clearly reflected in the coming of age of private equity business in the country. In late 2000, the few PE players who managed only to get small minority stakes in Indian companies as promoters were not ready to have them play a greater role than that of mere financiers. 

Between 2005 and 2014, global PE funds were chary about betting too much money on India, especially as getting exits based on a reasonable return on investment was becoming a problem.

But since then there has been a sea change. The situation has gone from promoters not allowing any say in the management to control deals, in which PEs have a majority stake, constituting 24 per cent of the value of all PE deals in 2019 to date.

Moreover, the average size of the PE control deals is getting bigger; they more than doubled from $65 million last year to $165 million to date. PE funding is becoming increasingly the core for FDI. In 2018, PE funds constituted over 70 per cent of total FDI in the country. Of course, this number would be slightly lower for foreign PE funds as some of the Indian companies raise money within the country. But experts say that it is minuscule and most of them also go abroad. That apart, in a clear sign of maturity, last year the value of exits based on deals undertaken by PEs hit $33 billion. 

Clearly, PE funds are cashing in on the new emerging areas of business. However PE funds admit that handling conglomerates needs special expertise and acumen as they are complex deals. For one, it might require carving the potential target into a separate firm or unwinding cross-holdings in group firms. For another, some PE fund managers fear that any increase in the trend to fund promoters through debt instruments morphed as equity, such as compulsory convertible debentures, could only postpone the debt problem of promoters.