Distressed India Lures Private Equity

Burned once before, investors are returning on the promise of faster growth and a bankruptcy overhaul.
At Closing, June 20st
24.28 USD

India's back in fashion for private-equity players: this time those looking for distressed assets. A surge in bad loans to once-thriving and now defunct companies such as Kingfisher Airlines means there are plenty of turnaround plays to pick from. Crucially for investors, India's in the process of shaking up its myriad bankruptcy regulations, meaning the time it takes to get troubled businesses into fresh hands may soon be shortened.

The government is hoping to pass a bankruptcy bill by the end of the current legislative session ending in mid-May. That could allow a company to be wound up in as little as 90 days. Under the existing framework, based on rules that in many cases date from the early 1900s, wind-up petitions can drag on for 15 years.

A separate initiative by the central bank now allows lenders to swap debt into equity. This will enable creditors to take control of failing companies rather than watching their owners or ``promoters'' spend years running it into the ground.

Firms including TPG, JC Flowers (currently helping China's Anbang Insurance in its bid for Starwood Hotels), CPPIB and KKR are flocking to the country, lured by the prospect of buying cheap assets in an economy set to grow at a faster pace than China this year. TPG co-founder Jim Coulter has called India its ``single focus", saying the firm could write ``billion-dollar checks" there.

With bad loans standing at about 14 percent of banks' total advances, the highest in more than a decade, there's no shortage of distressed assets ripe for picking and restructuring.

Last year, India was the star in a sea of weak Asian private-equity returns, with gains jumping 85 percent from 2014's levels, albeit off a low base. By contrast, returns in China declined. It's no wonder that private-equity investing in the country reached a record in 2015.

Cause for Hope

Annual amounts returned to private equity investors in Asia, China and India ($ billion)

Source: Asia PE Index/Centre for Asia Private Equity Research Ltd.

India has been a hot destination for private equity before, reaching a peak in 2007 in the run-up to the financial crisis, according to Bain & Co. Then, the oil-dependent economy slumped, foreign investment slowed and the rupee tumbled. Investors in infrastructure projects or foreign-currency bonds found themselves stuck with assets they couldn't get out of or had to sell at very low prices. This time around, private-equity money is flowing mainly into startups.

India Rush

Private equity investing reached a record last year and is continuing to rise ($)

Source: Bloomberg data

In the past, distressed debt has tended to be a black hole. Creditors in India recover only about 25 cents on the dollar in the four years or so it that takes to reorganize an insolvent company, according to the World Bank. In the U.S., the average is 80 cents in half the time.

While the problem of getting out of bad investments looks like it's being solved, the issue of making good long-term returns will remain a challenge. 

Over a 10-year period, private-equity returns have lagged well behind those in China. The internal rate of return on Indian investments made between 2004 and 2013 was 5.8 percent, compared with 22.6 percent for China,  according to an analysis by the Centre for Asia Private Equity Research. The IRR for Asia as a whole was 11.8 percent. For every dollar invested in India in that time frame, an investor would have seen returns of $1.70, versus $2.30 in China, the research firm said.

Investors burned in recent years by defaults on foreign-currency convertible bonds are ``proof that it's easy to lose a substantial portion of your investment if you invest without undergoing the required due diligence," according to Mihir Chandra, head of research at fixed-income firm SC Lowy. Patient investors have made money on the foreign-currency convertibles of wind turbine maker Suzlon Energy despite a record $220 million default four years ago. Still, plenty of other cases have inflicted losses -- including those by GTL, Geodisic and Tulip Telecom.

Even with control over day-to-day running of an ailing company, private-equity owners will have their work cut out to exit these essentially illiquid investments. Whether Indian banks will sell distressed debt at ``realistic valuations" given their provisioning constraints is another issue, says Chandra. (Earlier this month, Kingfisher's banks tried to sell an almost 4,000-square-meter property owned by the carrier in Mumbai but failed because its reserve price was too high, according to Forbes.)

And in the meantime, of course, the overhaul of the bankruptcy code remains a work in progress. Given India's poor track record as a source of gains, there's a lot riding on its success.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

    To contact the editor responsible for this story:
    Matthew Brooker at mbrooker1@bloomberg.net

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