STRESSED ASSETS - LURE OF MONEY?
Say, “ Anil Ambani” and what comes to the mind instantly? A man with a huge mound of debt, terribly stressed. That’s how we see him, always, at least for a few years now.
But say the very same name to some foreign investors and they see the “$” sign dancing in front of their eyes; an opportunity in adversity.
That explains why the subsidiaries of debt-ridden Reliance Capital have received such an overwhelming response, even in these pandemic times. Not one or two, or even 10, the subsidiaries have collectively received over 60 bids and list of bidders is dominated by global PE funds.
Reliance Capital, which holds 100% of Reliance General Insurance has received 18 bids from the likes of Blackstone, KKR, CVC Capital, Bain Capital, JC Flower.
Reliance Nippon, in which Reliance Capital holds 51% stake, 16 bids have come in from Bain Capital, Dabur Investments, Bandhan Bank, NIIF and Multiples Asset Management. There are reportedly six bidders for Reliance ARC and eight bidders for Reliance Health. Bids have also come in for Reliance Capital’s stake in Indian Commodity Exchange (ICEX) and its Paytm e-comm business, Reliance Securities
Reliance Capital’s total debt currently stands at Rs.21,000 crore, including accrued interest up to 31st Oct’20. It plans to sell its stake in these subsidiaries and become debt free.
So, what makes stressed assets so attractive? Its like buying something which you know is very good for later use on an Amazon sale. Apart from cheap valuations, despite the pandemic and rating downgrades, global investors clearly feel that India’s long-term growth story is good; most expect a sharp ‘V’ shaped recovery.
The big question which everyone has – what do PE funds do, buying into such stressed companies?
They obviously make insane amount of profits. They buy into these stressed companies, turn it around and then sell at huge profits. Unlike Venture Capital (VC) funds, which provide funds and mentor startups for a stake in the company, PE Funds almost always invest only in mature companies for a majority stake. Like vultures, they look out for established businesses which are falling apart, decaying due to inefficiencies but retains the possibility of growth. Their entire investing ethos is based on the foundation that they can correct the inefficiencies and once that is done, businesses will once again become profitable.
As we see more stressed assets being put up for sale, it will be PE funds which will make dominate, putting attractive bids for controlling stakes as they can then drive the business and chart their own exit.
Yes, the writing on the wall is clear – the number of control deals from PE funds is only set to increase.