Global private equity firm KKR, which has about $4 billion of assets under management in India including $1.5 billion of credit business is positive on the resolution of stressed assets.
India head Sanjay Nayar, in an exclusive interaction with CNBC-TV18’s Nisha Poddar, says that State Bank of India is a hero in its efforts to solve companies’ issues and put them back on track and hopes that other creditors also follow the SBI example. Nayar also admits that the biggest learning from the recent issues is that a forensic study needs to be done before investing in a company for a deeper analysis and understanding.
Edited excerpts from the interview: How is your India business looking at the moment of ten years of your journey and then we will go on to different businesses one by one?
I think at the end of ten years we feel very satisfied about the fact that the journey which we embarked upon, which is to provide long-term flexible capital to conglomerates, corporates and entrepreneurs, has worked out well. We have four businesses in India, we have been investing for ten years and we feel good about the fact that the relevance of our business model is ratified and probably even more relevant going forward given the state of the economy and given the kind of opportunities we are seeing.
So, we feel very excited about what all we can do from here and the past has shown us that we have gone pretty good exits, pretty good returns but it has also taught quite a few lessons. So when you package those two, I think we feel very comfortable about going forward and actually recommitting and committing a lot more to the Indian economy.
Whenever I have met you and given your banking background, I have always joked around saying that you are not running a private equity firm, you are running pretty much a bank. You had different kinds of products like structured finance, promoter financing, acquisition financing and mezzanine structure as well. Now all of this put together in an environment like this, most of the NBFCs are saddled, lots of banks are facing asset quality issue, do you think that strategy towards credit business could have been different?
With hindsight we can say many things but the fact is we have always worked on tenets of long-term relationship providing patient capital. The fact that you do it through a non-bank platform is exactly why, because the banks cannot do it, it is called non-banking. So when you structure deals like this, you are actually addressing a very clear need that the entrepreneur has or the company has. So that addresses why you do promoter financing or why you do junior OpCo financing.
I think there is no doubt that the strategy we adopted was perfectly fine and I think the problems you are seeing in the economy, then the NBFCs and then our own case and a few instances, it points to a couple of things. One obviously is the lack of growth in industries, second is just the intent and cases which may have failed from the borrowing side but we have always worked on the thesis that we are going to partner with the promoters, we are going to be very patient and very long term. So, that is something that you have to recognise and along the way if you have certain missteps or mishaps, one has to be like a big boy, take it and move on and that is exactly what we have done.
So you have taken a hit on your books when it comes to credit business. Let us talk about the CCD situation - how do you see the resolution coming across going forward because Blackstone transaction was a bit of a relief for the company but going forward do you think you will be out of the woods and this company will be out of the woods?
The board is working 110 percent right now to make sure that the group is on track. The Blackstone transaction as publically disclosed will definitely help when it closes, I think the board is extremely focused that the debt levels are brought back into control. And when you look at some of the India home-grown brands like CCD, I think it is incumbent upon the board, it is incumbent upon the creditors and shareholders to make sure that these brands actually flourish. These are not even halfway down the journey and there is massive opportunity to flourish a brand like this. It is not only about employment and agri sector or coffee but it is just the legacy that is there that can actually be built into something very significant going forward.
We think the resolution will happen, again I am no one to say that and we are basically 6.5 percent shareholder right now and I have been on the board for some time.
Do you think a complete sale in scenarios like this is possible, where there are fewer investors and the strategic are also jittery?
I cannot comment on it because we don’t know how things will move on, it is still too early to say. I think we will hopefully get to know in the next 2-3 months but all options will be considered to make sure that the brand flourishes and to make sure that the debt levels are under control.
The bigger concern that this particular situation has thrown up and I don’t want to go into the nitty-gritties of each of these companies because a large part of them are subjudice and under investigation, so they are all alleged but what we are focusing on and we have discussed as well is the promoter-investor relationship while private capital is so crucial for the India entrepreneurs to really reach the kind of growth that they want to. On the other hand there is a slight bit of disconnect with the investor community as well. Where do you see this at this current moment when there is definite stress in the system?
I think different people behave differently in a situation like this, as far as we are concerned we are a decade in India and decades worldwide of having partnered with entrepreneurs and companies and faced many issues, this is a small credit issue here. And our intent and what we have demonstrated is that, we can stick by what our agreement was, we have always been patient.
I think the promoters and entrepreneurs realise the value of private capital because forms of capital available today in India are quite few. I have no particular reason to believe that people are going back on their word or something like that, tensions will always brew between private capital and entrepreneur in some cases but I would say those are very easily solvable if the intent on both sides is clear, if the long-term relationship focus is clear and folks like us and some of the other peers, we bring in a lot more than just money. We actually partner with entrepreneurs to improve the business, the corporate governance, the supply chain, the go-to market strategies, the management staffing, there is lot more that goes in and that shows up over time and relationships come back on track because everyone realises that this was not just $70-80-100 million but look what private capital has done for us over the years and that is what is going to come out very strongly in the future because some of these companies will actually come out stronger than the past. So even if you go through these bumps, I suppose we are pretty clear as providers of private capital and a lot of private equity players that if you are patient and intent is clear, the overall design is clear and your partnership model is clear with the company, I think the end is going to be actually quite good.
So, I wouldn’t think that you should generalise taking some specific hiccups you are having in the market place today to take away from the fact that promoter and private capital relationships are actually getting stronger because each other’s needs are becoming much more clearer over the last two decades.
Maybe rules of the game are changing after the lessons we have learnt in this particular phase also?
I suppose not the rules of the game but I would say the tenets of understanding are becoming much clearer.
I also wanted to broach on CG Power situation, it is another such situation where you have from group exposure converted it into direct equity holding in the listed entity and then of course the board composition has also changed but promoter there is also contesting that. How do you see the situation there?
There is absolutely nothing for me to comment there, we have been lenders at the level of Avantha HoldCo for many years, we converted our debt in July ‘19, that is when the repayment was due, we gave due time for that and then with absolutely in a very patient way and in a very relationship-oriented way after giving a lot of time and chance to get paid back from the HoldCo, we converted the HoldCo debt into shares, which is as per the agreement.
Today we are just under 10 percent shareholder of CG Power, so from now on we are just like any other shareholder. We have to go along with whatever the board decides and whatever all the shareholders want to do. We frankly have nothing else to do after this, we could have done little bit more when we were at the HoldCo, but now we are under 10 percent shareholder and there is very little to do except just to be a shareholder.
But the promoter has contested the board’s decision to ouster the promoter Gautam Thapar as the chairman of the company. How do you see that situation and also the perception building that the investors have come in and they are taking over the company in a distressed situation?
I think it’s totally wrong. I mean I do not know about the board but to think about investors, there are many mutual funds out there, there are 3 big lenders against shares, which you know about and one of them is us but there is nothing like that at all as it pertains to the investors that I can think of.
What is the road ahead in your view in the present circumstances?
It is a great example where it is a real Make in India, iconic manufacturing brand. This company supplies a lot of equipment for the Indian railway sector and the power sector. So I can only hope and wish that the board will bring the business back on track, again deleverage, patience of creditors is required everywhere because these things will take time to recover. So a brand which can flourish, can actually make money for everyone. So that’s the road ahead. So that’s a wishful thinking but it can happen if all the right steps are taken. However, one thing that is becoming clear in all of this and I mentioned this twice; the patience of the creditors is very critical. As shareholders we have to just sit there anyway, but creditors today have to be a lot more coherent in their approach to trouble cases and there are so many of them in the market today.
I want to highlight that if there is one bank that is hero today, it is State Bank of India (SBI). In every situation that we see, the SBI and if they believe that there is an opportunity to bring the company back on track, they are taking the real leadership and they are providing capital, they are pulling together standstill agreements. So it’s quite interesting to see that if you have a public sector bank like SBI playing such a heroic role in a way, I think India needs more of these. India needs creditors to come together otherwise everyone has their own view on things and it is absolutely chaotic. I am not referring to NCLT. I am just referring to functioning cases that can get better or they can get worse. So the action taken by the creditors is going to be very critical and I think SBI is playing a fantastic role. I hope others do it as well.
When you look at your credit book at this point, what are the concerns that you feel could crop up in future as well. Is the pain far from getting over right now and how are you positioned when it comes to your asset quality situation compared to some of your peers in the industry?
I think we are very comfortable now because we are private; 3 very long-term shareholders. We have taken the measures we need to take. We have, post September, just the facts, we will be under 2 times leveraged, we have no negative ALM bucket right now, our net NPAs are below 2.5 and our capital adequacy is at 36 percent and one of the reasons for this is that we move very fast and quick in reserving and provisioning because on one side we are very patient with our borrowers and we cannot do much; anyway we are one of the few lenders, so it is not like we control the company and therefore, if you have to be patient on lending side then you have to be a lot more on surgical on taking the provision. So we have taken the provisions, taken the hits and move on from there and after that is the numbers that I gave you. So we feel comfortable going forward. The big question is how to recreate this whole credit business in India for everyone. We are not the only ones, but all of us; how to recreate the business and that’s the question that we have to tackle going forward.
What are the lessons? At the very beginning you said there are some lessons that have to learn from the situation. What are the lessons that you have learnt, is it going to be stronger due diligence process and also probably less risky assets?
I think there are different examples. I do not think it is got to do with riskier and not riskier. You can always structure a risky credit the right way. You can always go wrong in a secured credit also. So a lot depends upon how you structure the transaction, a lot depends upon the risk reward you take and one thing that we will do a bit more besides diligence and more important is get a bit more focused on forensic going forward because all of us bring in private capital, its foreign capital in this case. I think there will be a lot more forensic and deeper understanding of accounts and cash flows rather than just looking at the balance sheet. I think that is a key takeaway for us and that will show us a lot of things that we may have missed in the past.
Looking at the overall scenario as a foreign investor, do you also think that in distress situations, the corporate governance issues crop up more and that has also led to a deeper pain in the system than what would have prevailed? Do you think that corporate governance has been one of the big issues apart from the actual fundamentals of the business slowing down?
I am no one to comment on this but one of the things that I look back and I think this government is in a way formalising the economy and that’s absolutely music to our ears and by ‘our’ I mean a lot of private capital providers and private equity (PE) and venture capital (VC) firms. Formalisation has happened in terms of stricter corporate governance rules, much stricter action if found things have been wrong, you have seen demonetisation, you have seen goods and services tax (GST) and you have seen Real Estate Regulatory Authority (RERA). So this has created a great pedestal to have a much more formalised economy hence company and corporate governance. I think we are going through that transitory phase right now where what could have been par for the course or standard practice is absolutely getting challenged and I think it is great. We have to all go through this pain a bit, companies and entrepreneurs maybe going through a bit more but I think you will become much stronger and you will attract a lot more capital with much better corporate governance because there will be that element of comfort that foreign and local capital will have when they know that they are getting what they see and not something which is not evident.
So my view is that this is a transitory phase, we have to go through this, maybe takes a year or two but I would thank the government that we have driven this change. I just hope as I said earlier the creditors be in line as we go through this because you cannot bring these companies back to their glorious days unless everybody participates. One creditor pulling the plug actually has a contagion on the whole thing and that’s what we are seeing and so we need that to happen. Again, it’s not the government’s mandate to do it. It’s for all of us to stand up there and behave responsibly.
While you say this transition is going on, where we haven’t seen all come out as yet is the real estate sector. A lot of people in the market believe that in many companies which have large real estate exposure, there is going to be more distress. How do you see from your real estate portfolio where you have Rs 4,200 crore already invested? How do you see that portfolio and what is your view on the sector?
Real estate, I am not an expert. You should really talk to people who are experts. We have a small NBFC, which is just under one time leverage. We lend to developers for construction finance, we lend at the SPV level. So we really do not have any issues there, but I think your question on real estate is a valid one. There is a lot of scare about real estate, oversupply and pricing pressures and velocity of sales pressure but you should talk to somebody who is an expert on that than me.
From your point of view, from your real estate?
We are fine.
When it comes to private equity space which is your bigger chunk, you have done so many transactions, you have done Eurokids, Ramky as well as there has been a lot happening on the Max front where you have really backed one of your erstwhile portfolio investees, now how is your private equity shaping up? Is the credit market having an impact or a pressure on the private equity portfolio and which are the sectors looking good?
Private equity has been obviously our core business, it has done very well for us. But I think it goes back to a couple of things, one is the choice of the partners, second is really aligning our capital and our understanding with the entrepreneurs’ vision and goals from day one. Second is agreeing with the entrepreneur and the company what are the gaps that we can help with, is it capital markets, is it M&A, is it go to market strategy, whatever. Third is having a good understanding of what is the end state of the business. Because we are no one to go and force them to either go or do an IPO or strategic sales, so understandings have to be cleared. Again that has worked for us really well.
Today we are seeing an enormous number of opportunities coming out of the credit pressures in the market of controlled transactions and if you look at the transactions we have done in the last year, which is about a billion, two, this year alone we have invested a billion two in three controlled transactions and the pipeline actually looks quite healthy. All of these are coming out of situations where the company or the conglomerate would like to warehouse the business with private capital or sell it to private capital or get private capital to accompany the future growth. So, all the three models are working. Significant majority, totally majority, significant minority, I think that is the future.
Remember one thing, this year our industry has bought in $40 billion, it is not a small amount of FDI, I think this can easily double given what we spoke about the formalisation being driven by this government, given the lessons everybody is learning and if the banking system can step up I can tell you that you can attract $75 billion which by the way a lot of markets get so it is not something impossible.
I wanted to also understand which are the areas that now you are focusing on, is it bolt-on, platform formation or is it a complete buy-out?
For us instead of having too many companies, nothing better than consolidation, because consolidation is a big theme in India today. So you will see that happening in hospitals, you will see that happening in waste management, you will see that happening in education and financial services, which is really our four big current investments today, so that is one. The second is infrastructure, since we have got the new head for infrastructure, we just hired Hardik, we are working with a private sector. We have done the deal with Sterlite Power Transmission, we brought IndiGrid and great partner in Sterlite Power there. We are looking at some renewables business as we speak, so creating a couple of infrastructure investment trusts (InvITs) in India which give you a cash yield of 13-14 percent in rupees is fantastic for infrastructure pool of capital.
So you are looking at more InvITs than what you already have invested in?
We are only one InvITs today that itself will grow over time but we will put up some other InvITs as well. I think you will find in India by the end of next year and again back to the macro coming through you will find all forms of capital, -- the alternate risk capital of the private equity guy, we spoke about that. You will hopefully find credit capital coming back which is still a question mark and how it comes back, and infrastructure capital is going to be a very big area and the last point is if the government begins to monetise, or recycle some of their core assets like fibre, oil and gas pipelines, I think then sky is the limit of what kind of capital can come in.
You will also participate in disinvestments?
Absolutely, we will participate in that, we have known to do big deals like ADNOC in Abu Dhabi, so we will absolutely use our global technology to do things in India on that front.
If I may ask how much would you like to invest in the next one year given that there are just so many opportunities available if you find the right candidate, there is a ballpark figure, I am not saying you tell us this is exactly what we have set aside, but at least what is your estimate?
Every year we have been doing anywhere between half a billion to a billion in private equity, credit has been usually between half a billion to 750, I think anywhere between $1-3 billion is probably there. But things could really spike up and we could move faster in some instances because the opportunity today is much bigger than what was in the past and there is no dearth by the way of capital available for India.
So NBFC and banking space, these are facing a whole lot of issues do you think there is an opportunity over there for KKR as well?
Not going to comment on any specific names but yes, there are big opportunities.
When it comes to telecom, telecom-related sectors, you have some investment in Bharti Infratel as well, there will be more block soon, is that a sector of your choice at all?
It is in our infra pool, we will see as time goes by. It is too early to say anything. There is a lot of flood in the telecom sector right now.
Which are your other sectors which you are more keen on, you spelt out a few but hospitals and a few others?
We would be keen to look at some of the dollar-earning sector and exports. I think one area where India can do a much better job is in exports. I know manufacturing exports is not easy but IT is going to come back and is already coming back and doing very well, so that is one sector we could look at. We could look at pharma as well, so a couple of sectors that give you dollar earnings and natural hedge is not a bad idea.
The distress situation that you have been looking at, is there anything meaningful happening there as well?
On the pure distress, the big question is how does the NCLT, NCLAT, these processes go. Right now it is a bit iffy as to how it ends. Once we have a few judgements out of the way, and the picture becomes pretty clear, surely there will be a lot of distress capital available for India as well.
When you look at the India macro situation, for the country to be an investment destination what are the top priorities that you look at and the factors that really drive your decision on India?
First and foremost, I think political stability has been a huge positive, it has been for five-and-a-half years, I think the governance model has come a long way at the government level, and I think it is fewer policy rollbacks, fewer uncertainties on taxation at least from a private capital point of view there are very few uncertainties from what is our tax, those things are pretty clear. So one is getting the uncertainty out of the way, it has done a great job on that, the governance model and the whole formalisation of the economy so that really helps. What we need now is growth because ultimately capital coming into India is for growth, it is not for restructuring and cost cutting.
On the growth front we have had a couple of tepid quarters, but as a tale of two cities, frankly if you look at it, if you just look at the growth in affordable and middle-income housing, you look at the number of mobile units being shipped, you look at the connectivity of Indians to mobile, and then you have just the whole growth in New India. Then you have the corporate credit side, which has sort of come off by 88 percent and we need to see how that comes back. My view is that with capacity utilisation back to about 76 percent, inflation at sub 4 percent, I think there is a great time to rave up the economy and it should get raved up if your utilisation is so high. The only way it will get done is if private capital comes back and private capital comes back if you make life a little bit easier for the Indian entrepreneurs to come in.
So, number one the tax cut is very welcomed that is obvious and the second one is we get some of the other vectors like land, labour, a little bit of bureaucracy and financial capital coming back for the local entrepreneurs, I think you can get the virtuous cycle started again. Because you got the consumption there investment should start given where the capacity utilisation is - it is only a question of put a spark into a spark plug and I think that should come pretty fast.
I hope that it gets done quickly because you can’t lose time now, that is my view, and also I believe why we are so excited about this. We talk about this because if anybody can do it this government can do it. They have the conviction, they have the strength of ideas, so it is the question of just executing. So we are pretty hopeful, and I think the last point is that you will require capital, we are bereft of local capital or at least local long-term capital, the foreign capital like what we people bring in will continue to bridge that gap. But ultimately you have to develop local long term savings in India to bring back in the industry, so that is your provident fund, your post office, your insurance, your pension money, and that should come back. Till that time we will keep bringing in money.
There has been many management changes on the credit business side, even BVK has quit very recently. Do you think that was part of the overall corrective steps and is there more uncertainty when it comes to top brass of KKR in India?
Not at all. I think there haven’t been that many changes, changes are natural. We have grown from a two-man business ten years ago to 50 people now. We have hired this year 12 new people just to be clear. We just hired Kapil Singhal as the new Managing Director in the credit side so when you become that big in organisation there will be a natural churn.
So BVK was a natural churn?
Absolutely, he has worked for so many years.
Not at all.
And no more uncertainty on the top brass of KKR India?