Nomura offers to bridge the credit gap

There are businesses out there that need funds to achieve readiness for an initial public offering, but are unlikely to get it in these more risk-averse, post-crisis times. Nomura International recently hired Prasoon Dayal to run just such a financing service.

He came to Hong Kong in the mid-1990s and worked for Peregrine, then for the private-equity wing of AIG, before moving to JP Morgan and then Mount Kellett Capital. Dayal joined Nomura International in May as an executive director in its private-credit department.

There he reports to Chris Howe and runs the primary-credit business, meaning he provides funds directly to a company rather than purchasing an obligation in the secondary market. That financing might be via a pre-IPO convertible bond or a loan or bond plus warrants and will usually be for a two- to four-year term.

Nomura’s aim is to provide growth capital -- this financing is not designed for tier-one companies, as evidenced by the fact that the bank seeks returns in the high teens. It comes in $50 million to $200 million chunks and is collateralised where possible. Nomura will take 20-30% of a deal, but it is a client-focused business via syndicated and club deals. The aim is to do about 10 deals a year.

The competition -- who are also clients to whom Nomura might syndicate a deal -- include mezzanine funds, special-situations funds and prop desks.

However, it is not like in pre-crisis times, when an investment bank would put together a one-page term sheet for a deal and give investors 24 hours to make a decision, with no further due diligence allowed. Nowadays, an interested investor gets to compile his due diligence contemporaneously with Nomura.

The company deals involve some hybrid instrument, with the kicker of equity appreciation. However, Nomura will also consider sponsored financing of an individual, collateralised by his shareholding in a company.

Say, for example, an entrepreneur wants to diversify his company’s activities upstream or downstream, but borrows in his own name to develop the new business, which he might later sell to the parent company. In such a case, Nomura would, at the termination of the deal, get to keep some shares as a kicker or receive an additional fee based on the increase in value of the collateral.

Hence, Dayal’s work tends to be project finance; raising money to build new capacity that will take the firm to a new level, with the prospect of justifying a public offer at a later date. The rationale is that a company doesn’t usually come to market looking to raise money for a project.

“We contribute the last slice of capital before the IPO,” says Dayal. “In other words, a kind of third-round private equity. The firm can repay any loan with IPO proceeds and we still get the residual benefit of the shares.

“Public markets in Asia are more oriented towards providing exit opportunities for entrepreneurs, and private-equity players are increasingly gravitating towards the public markets as well,” he adds. “Hence, the private-credit business is increasingly becoming the sole source of the capital that lets private companies scale up to go public.”

So why don’t banks undertake loans like this?

“Commercial banks are often too conservative to lend in the scenarios we look at, and today banks like to be severely over-collateralised,” says Dayal. “Growth projects suck up capital, and bankers like to see amortising loan balances rather than bullet repayments.”

Nomura is targeting India, Indonesia, Australia and frontier markets like Vietnam, which he considers to be a generally more industrious society, evidenced by the number of people out and about on their mopeds when the rest of Asia is still having a lie-in.