Distressed Firms Lure Tata’s First Special Fund: Corporate India

Tata Capital Ltd., the finance unit of India’s largest business group, plans to raise as much as 5 billion rupees ($94 million) for its first fund that will invest in equities of distressed companies.

Tata Capital Special Situations Fund has attracted five state-run banks to invest in the fund, which may be fully subscribed by March, T.A. Ramkumar, head of Tata Capital’s special situations investment business, said in an e-mail. He declined to identify the banks.

The highest borrowing costs among major emerging economies and slowing growth in gross domestic product have crimped earnings and the ability of Indian companies to pay debt and raise capital. Rising bad loans are the biggest risk to the banking system in Asia’s third-largest economy, according to Kotak Mahindra Bank Ltd.’s billionaire Chairman Uday Kotak.

“This is an ideal time to raise money for such a fund,” said Mahendra Swarup, president of Indian Private Equity & Venture Capital Association. “One can then be ready as more assets get into trouble and opportunities arise in the next two to three years.”

Ramkumar didn’t disclose names of companies or industries in which the fund will invest. Loans to the infrastructure and mining industries are particularly under duress, Kotak said in an interview in Davos.

“The No. 1 focus and concern for the system, the banking system, is rising bad loans,” Kotak, 53, said in an interview with Bloomberg Television while attending the World Economic Forum. “A lot of large corporates have got themselves over-leveraged, and that’s where the pain is.”

Working Capital

The fund was marketed to banks because they would benefit if a company is revived, said Ramkumar. Tata Capital manages about $1 billion in four other private equity funds, according to the company’s website.

More than 700 Indian companies, including Kingfisher Airlines Ltd. and wind turbine maker Suzlon Energy Ltd., had negative working capital, indicating their current liabilities exceed cash and other short-term assets, as of March 31, the highest since at least 2000, according to data compiled by Bloomberg.

“This could be a different strategy for banks to reduce their non-performing loans,” said Swarup. “It can emerge as an alternative to corporate debt restructuring for small and medium enterprises.”

State Bank of India, the nation’s biggest lender, is planning to sell part of its 492 billion rupees of soured loans to boost asset quality. Bad loans at Indian banks widened to 3.25 percent as of June 30 from 2.94 percent in March, the Reserve Bank of India said in report on Oct. 2.

State Bank’s shares, which have gained 18 percent this month, fell 0.3 percent to 2,428.95 rupees at 10:45 a.m. in Mumbai.

High Returns

The fund may also help Tata Capital generate higher returns than normal. The company, a unit of Tata Sons Ltd., predicts an internal rate of return of 30 percent, according to Ramkumar. That compares with 15 percent for private equity funds and the central bank’s 7.75 percent benchmark rate.

New York-based KPS Capital Partners LP’s $2 billion KPS Special Situations Fund III produced a 21 percent net internal rate of return as of March 31, according to data from California Public Employees Retirement System.

High returns are attracting other firms to set up funds to invest in distressed companies. ICICI Venture Funds Management Co., a unit of India’s second-largest bank, set up AION Capital Partners, a special situations fund in 2011 with U.S.-based Apollo Global Management.

Mumbai-based Arth Equity Advisors LLP plans to invest about $75 million in companies facing “incipient stress,” said Sumit Chandwani, managing partner at Arth, which manages $100 million and plans to raise an additional $150 million by December.

“The entry valuations are not fancy,” said Sanjeev Kishan, executive director at PricewaterhouseCoopers. “If they are turned around, the higher returns would be easy.”

Liquidity Crunch

Chandwani said his fund invests in companies that are facing a liquidity crunch or have incurred losses because of derivative transactions, as long as the management has a good corporate governance record. Companies that aren’t able to pay their convertible debt also make good candidates, he said.

“The funds infuse equity, re-balance the capital structure and bring in operational expertise,” said Kishan.

Clearwater Capital Partners LLC’s 2 billion rupee investment in the cash-strapped Diamond Power Infrastructure Ltd. in August 2006 helped the Indian maker of power cables expand into making transformers and transmission towers, said Jayesh Patel, senior manager, finance at the Vadodra-based company.

Clearwater owns about 9 percent of the company that returned to profit in 2008. Firstcall India Equity Advisors Pvt. forecasts Diamond Power will report a record profit of 1.4 billion rupees in the year to March.

“Some companies will always make strategic mistakes,” said Arth’s Chandwani. “And that presents an opportunity for us. We feel this is a less crowded space in the market.”

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