Funding for the long term

When India’s largest pension fund the Employees’ Provident Fund Organisation (EPFO) announced in March it would inject some of its $100 billion overall war chest into debt funds, it served as a cue for other Indian pension funds to look more closely at the asset class. It also came at a time when Indian fund managers are elbowing their way into the debt market, which is expected to expand rapidly in the next few years. 

The EPFO foray was not altogether surprising. For some time now India’s finance ministry has been urging insurance and pension funds to invest in debt. It’s been particularly vociferous about the opportunity in the infrastructure sector, as these investments in particular are crucial for India’s development which faces severe constraints as banks and developers have little room to deploy fresh cash into projects with longer maturities.

Regulators are trying to help. In 2013, the Securities and Exchange Board of India (SEBI) allowed only 12 alternative investment fund managers to launch funds in the country last year.  However, SEBI announced last month that it would give 47 fund managers the mandate to set up Alternative Investment Funds (AIFs).

Fund managers already registered with SEBI and poised to launch funds with debt components include Ambit Alpha Fund, ArthVeda Alternative Investment Trust, Karvy Capital Alternative Investment Trust, Motilal Oswal Alternative Investment and HDFC AMC Real Estate.

So far, most demand has come from institutions seeking exposure to infrastructure debt. “The whole point is to provide long-term funds to projects and companies – returns are not only stable, more importantly they are domestic,” a Mumbai-based fund manager told Private Debt Investor.

ArthVeda, the private equity arm of housing finance company Dewan Housing Finance, launched a INR2 billion ($40 million; €30 million) infrastructure debt fund, offering institutional investors exposure to refinancing and distressed debt opportunities in the Indian market.

“Local institutional investors are still seeking stable value propositions in infrastructure debt,” Lokathan Nadar, portfolio manager at ArthVeda, told Private Debt Investor. “It is widely known that many infrastructure projects are maturing and are in dire need of financing.”

Outside the world of infrastructure, smaller niches such as debt funding for social enterprise initiatives are also receiving attention. In April, Hyderabad-based Caspian Advisors set up a $40-million fund to provide debt capital to a wide range of institutions serving low-income or financially excluded communities. It says the current supply of debt to social impact enterprises is “scarce in India”. The fund will invest in specialised intermediaries that support social entrepreneurs in their efforts to scale their businesses “without depending entirely on equity capital or debt funding from banks”.

 The Indian government’s willingness to attract foreign investment in the country’s corporate sector via debt was made clear last month when it raised the ceiling for such investment. Previously capped at just $1 billion, qualifying foreign investors can in aggregate hold up to $51 billion of Indian corporate debt as of 1 April.

Private equity firms are increasingly considering debt-related strategies in India as exit routes are clogged and many companies face debt payments they are unable to make. ICICI Venture and Apollo Global Management have raised $350 million of a $500 million special situations fund in India targeting such opportunities, while SSG Capital closed a $400 million fund oversubscribed for distressed businesses late last year.

“Private equity investors have felt a need for a more reliable instrument because they are not [always] able to see an exit, but [the debt] instrument will offer them a way out,” Ruchir Sinha, head of private debt and private equity in real estate, said.

Foreign private equity investors are increasingly appearing in India’s debt market. In April, Netherlands-based development bank FMO and UK development finance institution the CDC Group invested directly in Au Financiers, an Indian non-bank finance company that provides loans to SMEs. More look set to join them.  

With additional reporting by Clare Burrows.