After lending in excess of $1 billion to Indian promoters and companies through its non-banking financial company (NBFC) KKR India Financial Services Pvt. Ltd, Kohlberg Kravis Roberts and Co. (KKR), the world’s fifth largest private equity firm by assets under management, plans to expand its Indian operations beyond private equity.
“The idea behind setting up the NBFC business was if we only do private equity (PE) then there are not going to be enough deals,” Sanjay Nayar, KKR India’s chief executive and country head said. “The long-term plan is to build an asset management company, of which the NBFC will just be a part and over a period of time we could even set up a mezzanine fund.”
The NBFC has got balance sheet money and risk-taking capability, and has become a local financial services unit, said the former Citigroup India head who joined the American private equity fund in 2008.
Mezzanine financing is a non-conventional funding that shares the characteristics of both debt and equity and is typically used to finance the expansion of existing companies.
KKR India has deployed $600 million across four debt deals so far in 2011, up from $500 million in 2010. The PE firm, which has close to $61 billion under management globally, set up the NBFC in 2009.
Globally around $14.8 billion of its capital is debt.
The debt financing done by the firm almost equals its PE investments in India. So far this year, KKR has deployed $1.5 billion in six transactions. The recent one was a second round of investment of $75 million in Gautam Thapar’s Avantha Power and Infrastructure Ltd along with Faering Capital. KKR had invested $50 million in October last year in the power producer.
One of this year’s debt deals is a $85 million loan to V.G. Siddhartha, promoter of retail chain Coffee Day Holdings. The company has raised the money to refinance a loan for one of its IT parks.
“This way we also provide additional capital to current portfolio companies. This helps us strengthen partnerships,” said B.V. Krishnan, director at KKR India Advisors Pvt. Ltd.
According to him, the pipeline currently has $400 million worth of deals. “If all of them convert, we could end up doing $400 million debt deals by the end of the year.”
This year, the debt deals are on the rise as companies have not been able to sell shares to the public in a volatile capital market. Besides, there have been instances where companies or their promoters have been borrowing money to buy back an existing investor’s stake who wants to exit.
“Next year we will enter the second phase of our NBFC strategy. The first phase was just about setting it up and getting a deal flow for which we relied heavily on PE discussions,” said Nayar.
“In 2011, it has become a separate dialogue where we were able to access just debt deals and we want to build that,” he said.
Initially, the NBFC was capitalized with $50 million of proprietary money. KKR now plans to infuse another $50 million soon.
While the trend of PE firms lending is slowing catching up in India, globally many firms dabble in debt. For instance, KKR’s rivals Blackstone Group Lp, Oaktree Capital Management Lp and Cerberus Capital Management Lp lend money.
“There is a big opportunity for NBFCs like KKR’s because promoter financing is not easily available in the financial system,” said Mayank Rastogi, partner, private equity and transaction advisory services at Ernst and Young Pvt. Ltd.
“Banks don’t provide loans which are not asset-backed, while the smaller NBFCs may not write such large cheques. Also promoter financing is for a shorter term like 12-24 months,” said Rastogi.
According to some investors, specialized financing brings together specialized talent and the capital to lend money.
“Alternative asset firms providing debt is clearly an emerging opportunity because there is a growing need for specialized corporate lending,” said Dhanpal Jhaveri, partner and chief executive at PE fund Everstone Capital Management. “Specialized financing requires talent to understand and manage risk as well as capital.”
Goldman Sachs’ PE arm, Ashmore Group Plc and Everstone Capital joined hands to set up an NBFC Indostar Capital Finance Pvt. Ltd to lend to Indian firms. As of March, Indostar was capitalized with Rs.900 crore and has already started lending to firms.
KKR now plans to create a secondary market around the portfolio that it has built. “You will see us dabble in a lot of bonds and structured papers as the bond market develops,” said Nayar.
Source: Livemint