Minding the (credit) gap

Global financial markets have undergone dramatic change in the past 12 months.

“A year ago financing was available; it felt like fundamentals were gaining strength,” Sanjay Patel, head of international private equity at Apollo Global Management, told delegates gathered in Mumbai last month at PEI’s annual India Forum.

Now, he said, “equity markets are unravelling”, and many banks “either have to shrink or sell their assets”.

Indian companies, many of which are family owned, have traditionally relied on domestic banks and stock markets for growth capital. As global markets continue to be besought with volatility and growth outlooks dampen, financing from those sources is no longer a certainty. That, plus the country’s lack of a developed corporate bond market, all points to an increased opportunity for private equity firms offering credit-focused products.

“In this period of time being a credit investor is as interesting and valuable as being an equity investor,” Patel told the conference crowd.

He and Apollo are clearly not alone in this view: a number of domestic and international private equity firms have recently expanded their business lines to include credit-focused strategies for India.

Most recently, CX Partners, the private equity firm set up by former Citi Venture Capital International India head Ajay Relan, revealed plans to raise up to $500 million for a special situations fund with “a credit orientation”. Meanwhile, Goldman Sachs and Ashmore Group teamed up with Indian private equity firms Everstone Capital Management, which earlier this year closed its $550 million Fund II, and Baer Capital Partners, which manages the $200 million Beacon India Private Equity Fund, to form Indostar Capital Finance, a non-banking financial company catering to the credit needs of large Indian businesses.

“India lacks a broad-based credit capital market,” Sameer Sain, co-founder of Everstone, said on the conference’s sidelines. Most lending to corporates is via domestic banks, which are “prohibited from conducting several activities that you would see in traditional Western banks”. Those activities include retail lending, which is heavily regulated by India’s central bank. Now, companies like Indostar are attempting to fill that credit gap in much the same way groups like IDFC help fund infrastructure projects.

India has a credit market of about $750 billion, which is now growing at around 15 percent to 20 percent each year as various groups increasingly offer debt products, according to the Wall Street Journal.

One of the financing products that may also gain greater ground is mezzanine lending. In April, Mumbai-headquartered hedge fund manager Eight Capital began raising $250 million for a mezzanine fund, noting the combination of high interest rates and equity exposure in India’s rapidly growing mid-cap companies made the sector an attractive area for global investors.

Indeed, Juan Delgado-Moreira, who heads the Asia and Europe businesses of alternative asset manager and advisor Hamilton Lane, told India Forum delegates his firm was enthusiastic about Asian credit opportunities. “Even if you have an equity orientation in India and are trying to invest for growth, when valuations are so expensive you may actually get a better entry point by going into [a] family-owned company with a high return mezzanine-like structure where you are bearing risk but get some upside at reasonable exit values.”

With more private equity fund managers expected to help close the gap in India’s credit markets, institutional investors might soon be able to choose from a number of fund managers pursuing such strategies.