When you buy into a stressed asset, there is nothing called a good or bad promoter
By Anuradha Choudhary
February 13, 2017
Industry experts discuss how they turn around bad assets and play an active role in turnaround rather than being passive investors
Mumbai: Increasingly, investors are hiring turnaround experts with strong operating experience to play an active role in making stressed assets profitable. At the first Mint Stressed Assets Investment Summit on 16 December, top industry experts gathered to discuss how they turn around bad assets and play an active role in turnaround rather than being passive investors. The panellists include ReshmiKhurana, managing director (India) at Kroll Advisory; Narayan Seshadri, founder of Tranzmute Capital and Management Pvt. Ltd; Rajiv Kochhar, managing director of Avista Advisory Group Pvt. Ltd; AdityaAggarwal, managing director of Infrastructure Private Equity Fund at IDFC Alternatives; Anurag Das, managing partner of Rain Tree Capital Management Pte. Ltd; NagarajGarla, managing director and chief executive of IDBI Capital Markets and Securities Ltd; AvnishMehra, managing director of Everstone Capital Advisors; and Karan Singh, a partner at Trilegal. The discussion was moderated by Shrija Agrawal of Mint. Edited excerpts:
Agrawal: Could you perhaps throw some light on M&As (mergers and acquisitions) against the backdrop of legal architecture, now that we have a bankruptcy and insolvency code?
Singh: If you can’t have a legal architecture that backs a business, it is very hard to do business. This is basically a rule of law business. There is a predictability around legal architecture and enforcement that allows you to sensibly price an asset and have a return expectation that it may make. We are now entering a phase where a rule of law environment is being built. It will take a little while to develop and a little longer to be understandable. I think in this whole phase, this business will be rich and predictable. I think this is giving you a sound basis to say that we deserve to be an economic entity as India that attracts long-term stable capital that people will continue to invest in the future generation.
Das: The important piece is that we are in a situation where this is all coming with a lag. All of us here forget for a moment that we are halfway through a process of going from a $300-400 million economy to $4-5 trillion economy over a period of 25-30 years. We are halfway through. The changes behind us are going to pale in significance to what lies ahead of us.
Agrawal: So Avnish, from Everstone Capital’s perspective, you are largely a growth capital firm. You also do control transactions, and you also do minority. Now you have added a stressed assets division to it. As a firm, how are you thinking about the stressed assets opportunity?
Mehra: For a mid-market private equity (PE) firm, it is pretty simple to find an opportunity, make money in growth or in turnaround. From day one, Everstone was set up with a pretty large Everstone operating network, which is a group of operators who complement us as a deals team. So, from day one, we set up ourselves like we were in the Western world as a buyout business which has got a financial side and an operations side. So our ability to actually take control of businesses, sometimes put our own management team, has been there from day one. So we actually viewed this no differently from what we were doing in the past. It is just that now with some benefits of legal framework, maybe that area will be more prolific.
Agrawal: Chunk of bad debt essentially in infrastructure and IDFC largely being an infrastructure-focused PE fund, how are you looking at the opportunity set?
Aggarwal: I would rather segment the issue into three different buckets. One is governance related, one is operational and third being balance-sheet related. If there were to be governance related issues that lead to stress in the business, my personal view is that we would not like to work with that sponsor over a long time. Coming to the operational scheme of things, again one can divide up into two segments. One is external and one is internal. If there are reasons which are more external in nature, no matter which management change you bring in, if things are related to what the government or central bank does, I don’t think you can change things. But if there were to be things that because of management inefficiencies or let’s say stress at a holding company level, these are things which can be easily mitigated away by having a change of ownership or management. I think third one is the most critical in terms capital structure correction. Our experience has been that when you buy into some of these assets and when you take control of these assets, there are number of low-hanging fruits.
Agrawal: Rajiv, could you perhaps illustrate some examples, you used to work with PE funds that turn around some of these companies here?
Kochhar: We deal with the promoters on the one hand, specifically in India where in terms of the capital structure, Indian promoters think that equity is right on the top, whereas the first thing that we need to explain to them is that it is right on the bottom of the structure. It is a big war over there. I think it is very, very difficult thing in India. Though, it has definitely changed lately. A lot of turnaround has taken place. I think many years back, you would not have had the situation of any promoter or any Indian promoter selling assets. Today, there are tons of them. So, turnaround is not just a function of just an operating or financial. There is a lot around it.
Agrawal: What really is the turnaround? Is it really about buying or selling assets in the company, firing some people or changing capital structure?
Seshadri: There is a fresh look at everything that needs to be looked into. Whether it is the financial structure, capital structure, whether it is the management, whether it is the strategy, all of this falls into a basket and one has to take a comprehensive view about it. With that only the turnaround broadly can be done. The question arises whether the promoter actually is the part of the game or not part of the game. Also, it is a very important point, because again from the governance standpoint if the guy has been pilfering money out of the system, do you really want to work with him? So, you have to be careful as to how you manage that side of the equation. If I then look at many other situations where the promoter is good, it’s a matter of strategy or financial structure, etc. Here it may not be a complete management change. So, you do see all of this coming through in terms of any turnaround situation.
Agrawal: Any interesting revelation/intelligence where you do stressed assets? How is that different from growth transactions intelligence?
Khurana: It is very different. Over the last couple of panels, we established that when you buy into a stressed asset, there is nothing called a good promoter or bad promoter. There is a hypothesis about how are you going to gain from this transaction and that’s why you are going for it. Our job is usually to test that hypothesis. So that hypothesis sometimes could be like this is a good promoter and I can work with him. And it is sometimes about his reputation, relationships with supply chain and so on and so forth. Sometimes it is much more specific than that. We have worked with turnaround specialists who may say that my entire hypothesis rests on the fact that I think this guy has a sweet deal with such and such vendors or relationships. It is little bit of looking at the crystal ball. But I certainly agree that there is a change in the mindset where the investors are not just simply looking at financial engineering and low-hanging fruits from capital structure. There is a genuine desire to turn around the business.
Agrawal: Talking about public versus private sector banks, why is there so much of stress on the balance sheets of public sector banks and not on private? Does it mean that somehow governance in public sector is a little loose than private sector?
Garla: Most of them (private sector banks) actually did not participate into in major core sectors, especially like infrastructure, textile, construction, etc. If you look at their assets, it is totally on a different side. And most of their exposures are very, very small. They take a 5-7.5% stake. And whenever they smell trouble, immediately at whatever cost, they get out. Whereas, the public sector banks they stay put with the promoters even in the tough times. And even if they decide to exit, it is very difficult to exit from the business because their exposure is very high. If you look, public sector banks have a really important role in the overall architecture of the Indian economy.