Welcome to our ‘Fund in Focus’ series where we profile our member funds, underscore their investment philosophy, and highlight some of their interesting work. Today we speak to Piyush Gupta, Head of Credit Markets, Investec Capital Services. In this feature he throws light on India’s growing base of mid-market businesses and Investec’s commitment to financing the growth needs with structured private credit solutions.
FUND IN FOCUS: Completing a Decade of Underwriting Private Debt in India - Investec Capital Continues to Address the Credit Gap of Mid-Market Cos. in the Region
1. How would you describe the investment philosophy of Investec India?
Investec has been underwriting credit for mid-market businesses and sponsors in India for 10 years now. Over this period, Investec has participated in over US$ 5bn of financing across INR and FCY, having underwritten over US$ 1.7bn in 50+ financings. The strategy is sector agnostic and aimed at supporting mid-market businesses and sponsors to provide credit solutions for their non-bank end uses.
We typically make senior secured structured credit investments focused on mid-market companies. The strategy cuts across risk return spectrum, catering to a wide spectrum of end uses which are typically not catered to by traditional providers of capital including but not limited to M&A financing, leveraged finance, stake consolidation, refinancing, capital structure alignment, bridge financing, dividend recapitalization, growth capex. etc. We typically focus on leading mid-market companies with strong pedigree and corporate governance, steady profitability and free cash flow generation track record with robust growth prospects. We have had zero credit losses till date in our portfolio notwithstanding multiple credit shocks in the Indian credit market.
2. Tell us how has the Emerging India Credit Opportunities Fund I by Investec been deployed so far? Do share some exciting work of some of your portfolio companies.
Investec’s maiden credit fund in India (Emerging India Credit Opportunities Fund I (EICOF I) achieved its final close at INR 1,250cr in September 2022 (including INR 250cr of minimum sponsor co-investment). EICOF I has already drawdown ~85% of total capital commitments for portfolio investments. Most of our portfolio companies are amongst market leading, mid-market corporate players catering to specialised segments in their industries/sectors. We currently have a healthy pipeline and are evaluating several transactions at multiple stages for potential investments by the Fund.
Till date, the Fund has made 7 investments and 2 more are at execution stage. So, by end April, the Fund would have made 9 investments across sectors like renewables, manufacturing, building materials, pharma & allied businesses, design engineering and ITeS. The Fund has already successfully made 2 complete exits and 3 partial exits in line with Investec’s successful exit track record. The end uses for which the Fund financed the aforementioned portfolio companies typically included M&A, stake consolidation, refinancing and capex growth. One of our portfolio companies in the renewables sector, majority owned by global financial sponsors, is one of the leading C&I (Commercial and Industrial) solar platform (on-site and open access) in India with a growing presence in Southeast Asia. It provides customised solar solutions to help businesses meet sustainability targets while ensuring cost benefits of between 30-60% on electricity consumed. Key offerings include Offsite Solar/ Wind, Onsite Solar, Wind-solar hybrid, Energy Storage, EV charging stations etc. with key focus on rapid scale up of the platform both via organic and/ or inorganic growth routes.
Another portfolio company is the leading player in the Railway Track Engineering space and manufactures concrete sleepers, rail fittings for normal track, elevated & underground track for metro rail and ballastless track suitable specially for high-speed lines. The Company is the only player in this space with a pan-India presence and has ~15 plants with a cumulative manufacturing capability of over 6 million sleepers per annum. The group services over 1/4th of total sleepers required by Indian Railways and has a market leading position in overall sleepers’ market in India. The company has constantly innovated as per Indian Railways need and has constantly expanded its product suite from wooden to composite to wide gauge sleepers which has much better load bearing capacity thereby optimising the goods movement efficiency.
Given its stellar track record in sleeper manufacturing and technical know-how that the Company has gained over the years it is expected to be a key beneficiary of future projects undertaken by the Indian Railways.
3. Which sectors in India is Investec excited for growth opportunity in current decade?
India’s growth has been driven by public and private capital expenditure, thrust on indigenization through Make in India, PLI schemes, stable political environment focused on sustained policy reforms, favourable demographics and “China +1” strategy among other factors. The growth in Indian economy has been evidenced by India’s GDP growth estimates, which in 2022 were more than double the world’s average estimates. We believe that the growth levers driving growth in the Indian economy will persist and our outlook remains buoyant on the broader India growth theme.
Several of our portfolio companies are in an exciting phase of their growth journey with respective sectors such as infrastructure and pharma allied manufacturing, renewables among others which are witnessing strong push by the GoI as well as attracting significant private capital.
4. According to latest data by EY - Private credit saw more than 83 transactions valued at $3.85 billion i.e., a 47% rise from the same period last year. What factors are leading Indian mid-market companies to tap credit funds?
Indian credit markets have seen several structural disruptions in the last decade including, amongst others, slowdown in banks credit growth, NBFC liquidity squeeze triggered by events in 2018, COVID pandemic etc. These disruptions have led to several constraints being faced by traditional providers of debt capital including banks, NBFCs and mutual funds which presented an opportunity for Private credit as an asset class to grow significantly by providing flexible, bespoke solutions catering to the needs of mid-market companies and sponsors.
5. What’s your outlook for LBO asset class for 2023 in India?
2021 was a record year for PE/VC investments in India, recording an all-time high of US$75.9 billion. Post the initial shock of the pandemic, central banks globally encouraged a low interest rate environment which led to massive capital influx in the PE VC space but witnessed retraction as markets corrected globally in 2022.
However, Q4 CY22 witnessed increased PE VC investments vs Q3 CY22 and India focused financial sponsors are sitting on record amounts of dry powder to be put to work in the months to come. India dedicated fundraise witnessed a 125% growth in 2022 also which underscores the relative value and attractiveness for India investments. In addition to the increase in India dedicated fundraises, there is a high level of dry powder outstanding globally of over ~US$1.5tn (across buyout and growth investments) and a disproportionate allocation can be expected towards India amongst EMs on the back of relatively stronger economic growth outlook.
This asset class continues to showcase resilience, growth in demand and consistent outperformance viz a viz other asset classes. Private equity deal mix has also been witnessing a constant shift towards higher deal sizes as also an increasing proportion of buyouts which are typically more amenable to leverage.
6. Private Credit as an asset class is still in initial stages. How do you think will the development of this asset class will fare against other emerging economies?
While private credit asset in India has witnessed rapid growth in the last few years, it is still in its early stage of evolution relatively viz a viz global developed economy. The opportunity for alternate, private credit solutions is quite large as India has historically been a Bank dominated debt market and the domestic corporate bond market is still to realise its potential particularly for the non-AAA/ AA issuers. The liquidity and credit squeeze triggered by events in 2018 led to a significant retraction of NBFCs and credit mutual funds from the mid-market direct lending market. All this presents an exciting opportunity for private credit in India to plug the gap in the mid-market direct lending space.
India private credit space has been buoyant and supported by favourable policy reforms including the introduction and evolution of Insolvency and Bankruptcy Code, dedicated tribunals and other business supportive reforms providing the ideal launch base for private credit space in India. Recent correction in equity capital markets coupled with retracting liquidity has furthered the non-traditional private credit market where in the market participants are able to cater to financing needs via tightly structured private credit solutions.
The regulators have now put in a comprehensive framework for AIFs in India with slew of announcements made recently to further tighten the regulatory framework for the AIFs. Relative to many other emerging economies, India presents a very large domestic base of mid-market businesses and sponsors across manufacturing and services. India’s relatively more benign economic growth outlook and macroeconomic metrics, an improving ease of doing business, secular capex push by the Government and relative attractiveness for global pools of capital augurs an exciting growth in mid-market businesses which will have corresponding capital requirement both from equity as well as debt investors.