With Asia touted as the new frontier for global private debt investors, India is arguably now the main focus of attention in the region as a result of recent regulatory changes.
Various asset managers and banks have been busy establishing or expanding teams on the ground and raising funds to tap distressed and special situation opportunities – and large asset owners are now getting in on the action.
And they don’t come a lot bigger than Abu Dhabi's sovereign wealth fund or German insurer Allianz, which together have estimated assets of at least $1.5 trillion.
Between them, they recently made a total commitment of $700 million to invest in stressed and distressed debt in India. This is substantial, given that it represents their first investments into a very niche asset class and is larger than the typical general partner (GP) fund raised in this space.
North American pension funds are also jumping in, such as Canada’s La Caisse de Depot et Placement Du Quebec and the Texas Municipal Retirement System. Both have invested in Edelweiss’s private debt platform.
Investment openings are expected to emerge largely because the Indian authorities have moved to cut the level of bad loans held by banks and introduced a new bankruptcy law to that end in 2016 (see box, Rising opportunities in Indian debt).
Abu Dhabi Investment Authority (Adia) said in March that it had set up a $500 million India special situations fund – its first such vehicle – to be run by local firm Kotak Investment Advisors. The sovereign fund is the only investor as of now but there may be opportunities for other limited partners (LPs) at some stage, a source familiar with the state fund told AsianInvestor.
Adia was already invested in KKR India Financial Services, a non-bank financial company offering it exposure to largely performing Indian credit. The Kotak fund is more focused on pre-stressed and distressed assets.
Similarly, the $200 million that Allianz put into Edelweiss’s India Special Assets Fund II in February is its first commitment to Indian private debt.
The insurer, with €673 billion ($755 billion) in AUM as of end-2018, said in a statement at the time that it is looking to build partnerships with credible private debt managers with the expertise to lend to projects and companies in a complex environment.
Investments in special situations and stressed lending require more risk capital than investment-grade bonds, but in return, they provide a yield enhancement to the portfolio, a spokeswoman told AsianInvestor.
“Allocations to private debt also increase the diversification of our portfolio as they allow us to access segments that are not accessible via traded capital markets,” she added.
Both Adia and Allianz see the Indian market for non-performing loans and other private debt instruments as a long-term opportunity.
“Institutional investors can play an important role in building a successful secondary market for non-performing loans in India,” Hamad Shahwan Aldhaheri, executive director of the private equities department at Adia, said in a statement about the Kotak partnership.
The fund said it has increased activity in India in recent years, encouraged by the country’s strong economic growth and steadily maturing regulatory and legal systems.
Sebastian Schroff, global head of private debt and opportunities at Allianz, is similarly optimisitc about the long-term growth potential of the Indian economy and about the concomitant opportunities to finance attractive companies.
“The various reforms that have been initiated, such as the insolvency and bankruptcy code, have further strengthened our belief in the structural opportunity of Indian private credit for an international investor,” he remarked in February.
RISING OPPORTUNITIES IN INDIAN PRIVATE DEBT
Investors are expecting to see more non-performing loan (NPL) opportunities in India as a result of the revised bankruptcy regime first introduced in 2016.
The Insolvency and Bankruptcy Code created a single law for insolvency and bankruptcy to speed up the liquidation process and help prevent the accumulation of bad debt.
In 2017, the Reserve Bank of India followed that up by taking 12 of the country’s biggest loan defaulters to court. It was a landmark move by the central bank to demonstrate its ambition to speed up the debt collection process.
A record $23.6 billion worth of restructuring and bankruptcy asset acquisitions were subsequently executed last year in India, according to data provider Refinitiv.
Such developments have offered investors more certainty that they can profit from buying and restructuring distressed debt. That said, the protracted – almost two-year-long – insolvency proceedings against Essar Steel, one of the RBI's targeted 12 defaulters, shows how it can be more drawn out than envisaged by the authorities even under the new law.
Still, fresh opportunities have emerged as liquidity has grown scarcer since around September, said Haseeb Malik, head of Asia corporate and traded credit at Varde Partners.
Non-bank financial company balance sheets, notably, are facing asset-liability mismatches as short-term liabilities fall due in companies with three-to-seven years asset tenors, he told AsianInvestor. As a result, these face having to sell assets or restructure their balance sheets.
Look out for an article coming soon on AsianInvestor.net on the procedures and challenges when investing into Indian private debt, and for an extended feature in the forthcoming Spring 2019 issue of AsianInvestor magazine.