Private Equity's Indian Trilemma

Here's a way to tackle bad debt and rein in corporate titans' excesses.

Private equity in India is beset by a trinity of predicaments.

The first is what managers get paid for: finding businesses that can deliver 20 percent returns in an economy where asset valuations, at least in public markets, are already the most expensive in Asia.

Finding Value Amid Froth

India overtakes Japan to become Asia's most expensive stock market

Source: Bloomberg

A bigger problem is the frustration of knowing where the winners are hidden in the balance sheets of a largely state-owned banking system, but not being able to land them. That's because lenders to these $180 billion in stressed assets could face jail time if they were to sell them at prices that would be fair to private-equity investors but too low for vigilance officers. With one government-controlled bank's former chairman arrested in January this year for making loans to the now-grounded Kingfisher Airlines Ltd., the lenders' fear is far from irrational.

The third challenge is a plus-sized variant of the second, though most practitioners are coy to address it at even otherwise candid events like last Friday's Bloomberg private equity forum in Mumbai. That elephant in the room is Indian society's desire to see the rich humiliated.

Economics czars in New Delhi don't get the gravity of this third vexation when they define India's current state of affairs as a twin balance-sheet problem: Companies are overextended, and banks are undercapitalized.

It's actually a triple balance-sheet problem. The business owners who have welshed on their debt haven't had to make any visible personal sacrifices. Look at India's private jet market -- the spectacular growth in aircraft ownership seen between 2005 and 2010 has merely stalled. There's no sign of deleveraging.

Cruising Altitude

Ownership of private planes and helicopters in India grew rapidly between 2005 and 2010

Source: Business Aircraft Operators Assocation

Having stoically put up with the dislocation caused by Prime Minister Narendra Modi's demonetization drive, the middle class and the poor have very little appetite for forgiving the debt taken on by the rich.

KKR & Co.'s India chief has given the government a plan: Move all soured debt above a limit to a government-mandated agency, and use private capital to revive the assets. For any such proposal to have popular acceptance, Modi needs to put the controlling families behind the 57 corporate accounts that require haircuts of 75 percent or more into a room with creditors and private-equity managers. The government must indemnify bank managers for the losses they'll have to take on such sales. But businessmen's personal sacrifices will also have to be part of the deal.

The idea, in one sentence, should be to create a new class of corporate losers with the help of private equity. Get this right, and the taps to billions of dollars of global capital will open. And then, everybody in India, asset managers included, can get back to work -- free of the trilemma. 

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

    To contact the author of this story:
    Andy Mukherjee in Singapore at amukherjee@bloomberg.net

    To contact the editor responsible for this story:
    Paul Sillitoe at psillitoe@bloomberg.net

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