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Business trends

Private equity funds see potential in India's stressed assets

Investors have raised $4.5bn over last two years to pump into steelmakers, utilities

A laborer at an industrial area in Mumbai, India   © Reuters

MUMBAI -- India's sale of stressed assets is drawing massive interest from global private equity players such as JC Flowers, KKR and Blackstone, which are tying up with local companies to place bids or setting up country-focused special situations funds to explore opportunities.

Over the last two years as India's bad loan problem came to the fore, private equity players have raised an estimated $4.5 billion, based on figures from consultancy firm EY. This figure is set to rise further.

A committee of creditors recently approved a bid by a joint venture between AION Capital and Indian steel manufacturer JSW Steel for steel and alloys producer Monnet Ispat and Energy, which is in bankruptcy proceedings. AION Capital is a joint venture fund of Apollo Global Management and ICICI Venture Funds Management.

U.S.- based JC Flowers and India's Ambit Capital are also planning to raise $250 million overseas to buy stressed assets in the country, according to a local media report earlier in the year.

In December, the central bank, the Reserve Bank of India approved KKR's proposal to become the first full private equity-owned asset reconstruction company. KKR has invested around $8 billion since 2010 in different businesses in India. Blackstone too is planning to set up an asset reconstruction company, and is also bidding for distressed assets in the meantime.

Monnet Ispat, which has bad debts of over 120 billion rupees, was one of the first 12 companies that were dragged to the National Company Law Tribunal last year. Other companies in the list include Amtek Auto, Alok Industries, Bhushan Steel, Bhushan Power, Essar Steel, all of which are also attracting foreign interest.

Boston-based Bain Capital and its joint venture partner Piramal Enterprises together floated a $1 billion fund for stressed assets in August last year and competed with Tata Group to buy Bhushan Steel. Last week, the deal was completed by Tata Group, which was also reported up against Lone Star Funds, AION Capital and Oaktree Capital.

Another important asset attracting big interest is Essar Steel. Numetal, a special purpose investment vehicle controlled by Russia's VTB Group, and one of the members of the founding family, are aggressively competing with an Arcelor Mittal-Nippon Steel joint venture for a buyout. Though both the bids are facing opposition from banks, a resolution is expected soon.

Those companies are just the first batch of stressed assets up for sale. In the next round, 26 companies that have defaulted including big names such as Videocon Industries and Jaiprakash Associates, according to media reports, have been referred to banks by the Reserve Bank of India for a debt resolution process.

Analysts believe that this interest will be sustained over the next 10-15 years, given that more delinquent companies will be put on the block to de-stress the banking sector. Also, India's fast-growing economy and the government's reform agenda is giving confidence to global funds to invest in India.

Investors also expect higher returns from emerging markets such as India compared with matured economies such as the U.S. and Europe where low interest rates have pushed down yields.

A December PwC report points out that private equity activity in 2017 hit a record high with $24.7 billion of investments in 639 deals. Despite a 23% decline in volume, the year witnessed a nearly 50% increase in deal value over 2016.The report also forecasts that by 2025, private equity deals could surpass $40 billion.

India's banks collectively hold gross non-performing assets of over 8.46 trillion rupees ($129.69 billion) at the end of December. Lenders are trying to offload assets and make good their loan books.

"[Previously], the Indian stressed assets market did not have either the scale or the resolution process required to attract large global private equity players,"said Vivek Soni, partner and leader of private equity advisory at EY India. "But now as the NPA problem has become so big, both the government and the RBI are focused on getting the problem solved."

The government has relaxed foreign ownership rules by allowing overseas entities to hold up to 100% of asset reconstruction companies, pass-through status to asset reconstruction company trusts for income tax, an exemption from stamp duty, among other measures.

The private equity money will be an important part to resolve the recovery side of India's bad loan problem. So far, steps such as debt restructuring, haven't quite worked for banks and the bankruptcy law is seen as a key turnaround. This will also be key to the government to go ahead with its $32 billion recapitalization plans of cleansing banks.

Concerns are now raised over how far can the government keep pumping public money into banks with questionable lending practices, without aggressively going after recoveries of dues, especially after the recent $12 billion fraud at Punjab National Bank.

Companies referred to National Company Law Tribunal for Insolvency Proceedings

Loan default amount (in billions of rupees)

Bhushan Steel


Lanco Infratech


Essar Steel


Bhushan Power & Steel


Alok Industries


Amtek Auto


Monet Ispat & Energy


Electrosteel Steels


Era Infra


JP Infratech


ABG Shipyard


Jyoti Structures


Source: Press Trust of India

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