KKR Ready With Long-Term Funds To Buy Bad Assets, Says Sanjay Nayar
KKR will focus on companies and conglomerates looking for deleveraging, said Nayar to BloombergQuint.
Private equity firm KKR and Co. is looking for conglomerates and companies that want to deleverage their debt in a bid to help the companies gather working capital, according to chief executive Sanjay Nayar.
“Pure buyouts, significant buyouts, significant majorities, and very significant minorities” are the kind of deals we want to look at, Nayar told BloombergQuint in an interview. “These hopefully will be transformative deals which will improve the return on capital for larger conglomerates,” he added.
There are enough assets available, which we can buy, repair, create value, not only for ourselves but for the banks and maybe even for the promoters.Sanjay Nayar, CEO, KKR & Co. India
The time is right for KKR to step in as a "lot of assets are going down under because working capital is being squeezed" and banks are not lending, added Nayar.
Here are the edited excerpts of the interview.
Any indication that the Insolvency and Bankruptcy Code is working better than a Bad Bank would have worked?
We, as a firm, are ready with real long-term funds to buy bad assets, repairing them and making them better because there are many assets which are repairable. Today, a lot of assets are going down under because working capital is being squeezed, banks are not lending. So, a poor guy who needs 180 days’ capital but gets only 120 days begins to become a bad asset slowly and you start evergreening these things. The real problem becomes bigger than what it actually is.
There are enough assets available, which we can buy, repair, create value, not only for ourselves but for the banks and maybe even for the promoters. But time is passing by at a very rapid pace because of not getting the assets out at the right time. A chemical plant that is shut, cannot remain shut for too long. And if it’s shut for 3 years, then it’s over. That’s a big issue.
We have talked about a fair market price for a long time. But banks have not managed to hit that bid because they find that the bad assets are below the replacement value, some people find it below their reserves. This problem compounds every quarter, which will ultimately result in liquidation of assets. Then we will have no role to play as we are not liquidators. There are enough ways to carry out liquidation of assets, and unfortunately that is where the whole thing might head. If you cannot recover bad assets, then you either buy them at the pennies, or liquidate them.
Let’s say we were offering 50 cents on the dollar, then probably 30 cents on the dollar, and by the time IBC process happens, it will be worth 20 cents and the bid is worth 6 cents on the dollar, which is what happened last time. The process will become cleaner, people will feel more secure about it but we would have taken a massive hit there and lost productive assets.
We need to be more dramatic and that’s why a bad asset management company or a bad bank is the way to go. Then all the fiscal benefit can be used to capitalise the banks.
Of course, the best thing will be to privatise the banks but let’s not go that way.
Are more and more companies coming to the special situation funds as banks are not able to provide working capital?
We have a big non-banking finance company and we have big special sets fund. We don’t go around companies that are non-performing liabilities. That we’ll do only through our proper distressed approach. We are plugging the last mile in many cases and we are plugging extended working capital requirements which the banks are not fulfilling today.
Our NBFC is extremely busy because of the amount of demand we are getting from well-performing companies due to Goods and Services Tax, supply chain bottlenecks, exports, working capital extensions, and we are helping a lot of those. It’s a very valuable contribution that NBFCs are making today. We are just one of them but there are many others. The rates are higher than the bank rates but we are providing extremely important capital. The bad debts that can be repaired need long-term capital and NBFCs are providing it just the way PEs are providing long-term capital.
Has your ARC licence come through?
No, we are waiting. We applied for the ARC after the finance minister announced that there will be 100 percent ownership allowed for private equities. So, we applied for one because we are serious players in India, we are not here for the short term. Our application is still under approval at the RBI. We filed after the last Budget statement. It’s a new kind of approval for the RBI, ARCs being owned by private equity, and that’s why it is taking time.
We are patient and it’s another part of our tool kit. We want to have a tool kit in India that covers mezzanine credit, real estate credit, long term private equity and an ARC. So, that we can provide solutions. If it takes another 6 months, then so be it. It’s not the end of the world and it’s not that we can’t bid for assets. We can.
We have seen a bunch of IPOs in the last several months a lot of exits for private equities which is a tough thing to achieve in India. Do you see a lot of this money quickly come back into the country?
Absolutely. Just as private equities fund managers, India is now seen as a very interesting place for a couple of reasons like a formalization of the economy and general economic stability and the saving-investment gap. So, you are being presented with an opportunity here in the private equity where companies need that gap to be filled if they need to grow or they need to take the previous investor out or whatever. So, there is a massive opportunity. All PE firms are flooded with proposals of the most ordinary growth kind to the most complex transmission and consolidation kind.
The second thing is that we have not seen many exits. Investors who back us want to see money come back even if it is 5 percent or 10 percent return which doesn’t matter. India has never given the money back for a long time. From last 4-5 years, better capital markets, much better clarity on tax. We have to admit that we are not fearful of the fact that we will be questioned by the tax. They are clear simple rules and they have simplified lot of things. So, net of tax is taken money out of the country either through public markets or through trade sales. It’s a clear-cut process.
The third is, there is a big opportunity of getting into this companies and making them better. The Indian entrepreneurs who are either selling or inviting private equity are finally accepting private equity as an asset class that can be helpful to them. So, if you put this three together then this is the right recipe. Add on to this is a dire need for de-leveraging, succession plan, and all other good stuff. This is no big numbers and this will go up. Do not compare this with the market volatility because FIIs come in and go out but for private equity, this is the right time where we will bring in more money.
A thought on the quantum of supply coming into the primary market?
It is amazing how all of us in India have reset our expectations so low. Having six IPOs in a month is not a big deal. There are 20 IPOs in the U.S. every day. It’s a good sign of having more IPOs and more quality papers where there is nothing wrong in it. We need to see the diversification of the buyers also. That will happen as you get out of the way and let savings come in. But these multiples are crazy. Things will calm down.
Do you see the market overvalued as you are having a tough time to find investments?
We don’t invest in public markets. These multiples look high today if you step back. If real growth rates are what they are then there is still a degree of underutilization of the capacities. I can tell you that there isn’t much pricing power for a lot of these companies. So, I don’t see earnings growth unless you see earnings growth after the next few quarters, the markets are clearly overvalued.
What looks interesting right now?
Our focus is to spend a lot of time with the conglomerates and big companies and sees where we can help them sell things outright or significant majorities. We have done enough of growth investing stuff and growth is a bit elusive right now because it is the value you have to pay for it. So, we have to create situations. We are spending our time to look at conglomerates and companies who are looking at deleveraging and deconsolidation. Pure buyouts, significant buyouts, significant majorities, very significant minorities but very significant majorities are the way we want to look at. We can be impactful and value added there. These hopefully will be transformative deals which will improve the return on capital for larger conglomerates. A lot of companies developed overtime and they are looking at serious deleveraging opportunities. That’s our focus to look at one part of the group and see if one can put significant capital there, get ownership and that will deleverage the top. That’s we want to focus on. Private equity can play a very significant role in giving that capital. But if we believe that we can improve the asset and create more value, only then, otherwise it’s different.
Watch the full interview with Sanjay Nayar here.
(Corrects an earlier version which spelt Sanjay Nayar’s name incorrectly in the headline.)