Four years and 36 investments later, Religare Credit Advisors (RCAL) has a track record to be proud of. The firm, with $122 million in assets under management (AUM), has notched up 16 exits, each of them generating IRRs in the range of 18-27 percent.
Two years ago, RCAL was set up as a joint venture between the management team and Religare Global Asset Management, the $20 billion AUM multi-boutique alternative investment platform of the Religare Group.
However, RCAL traces its roots to 2011 when Kanchan Jain, chief executive officer (CEO) and principal managing partner and her team first started investing in private debt.
There was a big opportunity in the Indian mid-market, remembers Jain. The Indian private sector had witnessed a surge – through the late 1990s and early 2000s – during which corporates saw significant growth, driving capital formation and higher output.
The structured debt team at Religare, as it was called then, typically invested in proprietary debt transactions in mid-market corporates from the group’s balance sheet which specialised in providing finance to small- to medium-sized enterprises (SMEs).
Within a couple of years, Jain says it was clear that the market opportunity was tremendous and the business hugely scalable. In order to truly meet the needs of the Indian mid-market and to make the most of the opportunity on offer, the team needed to create an independent asset management boutique that could invest institutional third-party capital. As this was going to be hard within the existing structure, Jain and her team established RCAL as an India-focused private debt platform investing in customised debt investments. Religare Group demonstrated their confidence in the team by committing 25 percent to RCAL’s first fund.
Despite the Indian economy growing at a good clip, and certain industries growing at even faster rates, there was a dearth in funding. The banks were not in a position to meet the swelling demand for capital, an issue that lingers today.
Indian mid-markets corporates are well established corporate entities with good track records. The typical size of these corporates is about $50 million-$500 million in revenue. Jain says these are growing, EBITDA-strong companies with low leverage and yet they accounted for only 2 percent share of overall bank credit in India, or 4 percent share of credit to industry. It’s a “hugely underserviced” segment of the market, handing RCAL a rich niche.
The firm raised its first five billion rupee ($80 million; €72 million) fund entirely from domestic investors. The fund, with 21 investments, is fully invested. Seven transactions have matured and the proceeds recycled into new deals. Those exits have produced an IRR of 24 percent in rupee terms, returns that even any private equity fund manager investing in India would be proud of.
According to Jain, one of RCAL’s unique features is that it does not draw upon the larger organisation in any manner – whether for resources, operational assistance or deal flow. RCAL is a standalone entity that runs and manages all the origination and investment functions on its own.
Where the firm differs from most others is that it has a dedicated team for proprietary deal origination, which has allowed RCAL to manage a healthy rate of deployment into attractive investment opportunities for its investors.
Sandeep Adukia, managing partner and head of origination and business development, says that RCAL has “unique proprietary deal sourcing capabilities that are very specific to the mid-market”.
The majority of new deals are self-generated through its proprietary network including investee companies and relationships, says Adukia. In fact, each one of RCAL’s 21 transactions from its first debt fund has been proprietary – a track record any investment manager globally would be proud of.
RCAL prides itself in its in-house capabilities. “The whole transaction management function at our firm is robust,” says Jain, “and we have our own in-house risk, structuring and legal teams who work closely with empanelled service providers for due diligence and on-going risk management.”
The firm is now ready to start fundraising for its offshore fund, for which the primary source of capital will be overseas investors, in contrast to the first fund which was domestically backed.
“The other emerging markets besides India are having a hard time,” says Jain. The uncertainty enveloping a few of the other major emerging markets such as Russia and Brazil, coupled with expectations that India will be the only bright spot for growth in the coming year or two, means that institutional investors could up their allocations to India.
Moreover, says Jain, a significant amount of debt is coming up for redemption in several emerging markets, “so even without an increase in the allocation to emerging markets debt, we can expect more capital to come to India”.
Globally, a large number of institutional investors carve out their private debt allocations out of private equity, and this is another factor that could see more capital come into Indian private debt, at the expense of Indian private equity as returns from the latter have been far from satisfactory.
Additionally, private equity’s five- to seven-year investment horizon without interim returns opens it up to a high degree of currency risk. “In private debt, on the other hand, we look at periodic distributions and amortising principal, which average out exposure to foreign exchange rates over the investment period, so currency risks are mitigated,” she says. This reduces the impact of US dollar spikes in a way that Indian private equity cannot.
Most importantly, Jain says, “we are effectively making private equity-like returns from performing, growing companies with proven vintage, by taking debt risk”.
“By investing in companies with more stable businesses, strong cash flows and dominant market positions, you are still making equity-like returns because you are still providing them with growth capital. We are taking about 15 percent returns from good-sized companies,” she says. “Not even the US and Europe can offer a risk-return profile as attractive as that of Indian private debt.”
But this is only a part of the story. The more important driver for interest in the private debt space in India relates to the needs of the Indian market.
“About 20 percent growth in bank credit is needed per annum to meet the capital requirements of companies, which translates into about $200 billion. However, bank credit has been growing at a rate of just about 10 percent per year, which means that the shortfall is increasing each year,” highlights Jain.
Assuming that economic growth picks up over the next few years, the shortfall will be even larger.
India is characterised by moderate levels of debt, with domestic credit to the private sector as a percentage of gross domestic product at just 51 percent, the lowest among all major economies globally (in China, for instance, this figure stands at 134 percent). And of the relatively limited credit available in the market, most goes to the large corporates, leaving the Indian mid-market really underserviced.
“Vis-à-vis the requirements, there is a huge funding gap there,” says Jain. Moreover, she points out that banks just lend money, while with private debt platforms, “we are also talking about customised, innovative solutions for companies, and a lot of the banks cannot play in this area”.
Jain says that manufacturing and services in India have been growing at a cumulative annual growth rate of 8.4 percent over the last 10 years, higher than the GDP growth rate of 7.6 percent. These sectors have been growing faster due to a strong private entrepreneurship culture, in Jain’s view, and they represent the best investment opportunities.
According to RCAL, there are more than 1500 such companies in India with an income of more than $50 million, which are generating healthy cash flows and are operating with moderate levels of leverage.
“Moreover, these are companies have vintage, so it is easier to look back at their track record and performance,” says Anupam Goenka, executive vice president and head of underwriting at the firm. RCAL has so far invested in chemicals, residential real estate, financial services, agribusiness, garments, healthcare, and food and beverages.
“We take into account all of the business and cash flow analysis along with structuring aspects when we invest,” says Goenka. RCAL’s analysis of mid-market risk is a blend involving aspects used in SME underwriting as well as aspects considered when assessing risk for large corporates. This, Goenka believes, is one of the firm’s strengths.
Jain expects more of the same approach as the strategy grows. “We want to identify low risk situations, and still target 20-21 percent returns in rupee terms. Even on a dollar fund, we indicate that we will be able to comfortably return about 15 percent in dollar terms,” she says, confidently.
She’s comfortable with the progress made by the firm so far, and is not fazed by the influx of new players in the private debt space. Instead, she says she hopes for more players to enter the market. “I still don’t think there will be a dearth of opportunities, because the market is that big,” she offers.
In fact, she says, it will be good for the industry if more people are doing the same thing as it will lead to a better ecosystem. In saying so, Jain inadvertently reveals the confidence underlying RCAL's private debt strategy.