News analysis: Why Leon Black likes India

Buying up Indian corporate debt is a more attractive option than equity, which is one reason Apollo Management has singled the country out for special attention amongst the BRICs, writes Philip Borel. 

Across the globe private equity groups are going through a period of introspection. Indian private equity investors are no exception. Operating in a macro-environment that has gone from hyper-growth to something altogether more difficult, managers in Mumbai, Delhi or Bangalore are facing rapidly spreading investor doubt over their ability to deliver returns. It’s a tough and testing time.

About two thirds of the 750 Indian private equity investments in the Cambridge Associates database remain unrealised. The bulk of these investments are in minority stakes, so driving exits is difficult even for the most liquidity-minded managers.

“We’re not in control of these companies,” emphasised Gulpreet Kohli of ChrysCapital in a keynote speech at PE Asia’s India Summit 2012 in Mumbai in October the point being that the art of getting out of minority positions requires skill, discipline and a readiness to exploit windows of opportunity as and when they open. In volatile India, these windows can be narrow. With nearly 40 exits completed and circa $2.5 billion returned to investors, ChrysCapital has made better use of them than many of its peers.

The test for the industry as a whole is to raise its game in this area. (Asked to compare Indian private equity to a local dish, one GP joked it was like a vegetable Jalfrezi: cooked from a complex mixture of ingredients, constipating and difficult to exit.)

The industry also continues to have its work cut out on the deal sourcing side. Indian business owners – ‘promoters’ in local parlance – are known to drive tough bargains in their negotiations with private equity, especially when times are good and the businesses are doing well.

When times are not so good, or the business is under pressure, company owners are understandably less confident in their haggling with prospective capital providers. “The only time to get a good deal is when the promoter has his back against the wall,” said Mintoo Bhandhari, managing partner at Apollo Global Management India.

Speaking on a panel examining opportunities in Indian special situations, Bhandari argued that with 45 percent of Indian corporations leveraged 5x earnings, and 22 percent leveraged 8x, India was in fact the most overgeared economy in the world. And with 5,000 of the 40,000 or so corporate loans in the country not performing, Apollo was seeing a rich offering of opportunities to pick from.

Pick well we must, Leon Black’s man in Mumbai was quick to add. ‘Good company, bad balance sheet’ can work great, he explained; “Fixing the company and the balance sheet at the same time is an incredible challenge.”

Bhandari is building out Apollo’s operations on the ground and currently raising a local fund in a joint venture with ICICI, the bank. If that doesn’t convince you that here is $100 billion global manager being serious about India, then consider this: Apollo has no permanent presence in Brazil, Russia and mainland China. As far as the BRICs go, credit in India is where the firm is focusing its efforts.

One advantage of buying Indian debt rather than equity is that you’re not taking on any exit risk. Also, creditors can enforce their rights in an English-language court of law thanks to India’s common law-based judicial system, and there is plenty of precedent of creditor dispute resolution by legal means succeeding. And depending on the company’s financial health, it can even put you in the driver’s seat.

For India’s private equity investors, by contrast, the driver’s seat will remain a rare place in which to find itself, even once it recovers from that sense of self-doubt it has today.