In 1988, Kohlberg Kravis Roberts (KKR), the private equity (PE) giant, was at the centre of the mother of all corporate takeover battles when it acquired RJR Nabisco for $25 billion, a deal that has since been the benchmark for leveraged buyouts worldwide. Twenty four years after that battle, Sanjay Nayar, the CEO of the firm's India office, says, "We are involved with our partners as engaged shareholders and not necessarily intrusive".
Can they really be the same swashbucklers who featured prominently in Barbarians at the Gate, the best-selling book written about the Nabisco takeover? Some say KKR's made-in-India mantra is cautious, even conservative, but what no one denies is that it's a deliberate strategy by the ex-Citi banker.
Few deals in sight
Consider these facts: Now in its third year of operations, KKR India has done just six deals in India. The entire last year went by with just one deal being done, where it invested $55 million in a Kolkata-based non-banking finance company (NBFC) called Magma Fincorp. The biggest one so far has been the $900-million buyout of Flextronics' India unit followed by $250-million Bharti Infratel deal and smaller deals in Aricent, Café Coffee Day, Dalmia Cement and Avanta Power (besides Magma). The PE giant has put a total of $1 billion to work in India.
That's a minuscule amount for a firm that globally has over $60 billion in assets under management. But Nayar says that's because KKR will not do a deal if it can't find companies with quality management teams and is unable to get involved in some way to improve the business it invests in. "Our relationship with clients are not document-led, it's mutual trust at work," he says.
That may be making a virtue out of necessity, as the last three years have also not exactly been conducive to deal-making, with uncertainty hovering over the markets and the economy. Also, as Henry Kravis, co-founder of KKR, said during one of his India visits, leveraged buyouts—KKR's traditional forte—do not yet exist in India. "There's nothing to buy here; family companies are not for sale," he said.
So what Nayar has done instead is to focus on debt financing by setting up a non-banking financial services company in 2009—not quite the business the PE giant pursues everywhere else in the world. The NBFC, KKR India Financial Services, has executed deals worth $1.5 billion, something the 52-year-old CEO is very excited about.
A complete solution provider
"The whole idea of the NBFC was to become a complete solution provider to promoters or companies. It can be financing within the company where there are weak cash flows, where banks don't lend structured debt, or structured mezzanine financing. NBFCs can structure mezzanine solutions which are non-capital market exposures," says Nayar.
Mezzanine finance has traditionally been important in sectors where a promoter or company has limited asset cover to pledge, or cash flows are still weak in early business evolution.
Interestingly, these are also portfolio companies where KKR has already invested equity. If they want further financing, re-financing or promoter funding, the PE giant is there to provide strategic growth capital. Nayar sees a huge increase in the need for such alternate capital as India emerges from its current economic woes. "We make sure we structure the deals in a way that the companies pay a minimum coupon, with some kind of floor to total returns and sharing some upside, driven by Ebidta and equity. We find this as meeting both parties' objectives while creating real assets," Nayar says.
"Having an NBFC alongside a pool of equity capital allows an investor to provide a more comprehensive financing solution while possibly improving his or her overall risk-adjusted return. I think it is a smart way to look at investing in India," says Sameer Sain, managing director of Everstone Capital, which launched Indostar Capital Finance, a Rs 1000-crore NBFC, in partnership with Ashmore and Goldman Sachs.
It's not that the firm has decided to completely focus on its NBFC. For example, out of 15 staffers, nine are in the PE business, and Nayar says KKR never looks at clients as "target companies"; rather, it's a partnership approach. In any case, the only way PEs can make money, he thinks, is by working really hard with companies on operational improvement and profit generation.
For example, he is immensely proud of the firm's equity investments in the cement business of Dalmia Cement (Bharat), which is the biggest PE investment in the country's cement industry. KKR has invested as much as $125 million in a Dalmia unit, which owns cement factories producing ten million tonnes, a stake in OCL India and is also exploring new greenfield ventures and acquisitions across the country, so it can establish a pan-India presence. In Dalmia, KKR Capstone, the operating arm of KKR, worked closely with the management and helped them bring about efficiencies in logistics and marketing strategies and opened up new markets. "This transaction with KKR was not just about capital but the foundation of a long-term relationship," said Puneet Dalmia, MD, Dalmia Cement. "It enables us to enhance our capacity and market share through organic as well as inorganic routes, while benefiting from KKR's global network and proven value creation capabilities," he added.
A temporary lull
Nayar is confident that the present economic uncertainty in the country should be temporary, as India offers long-term growth potential in every sector. "The current controversy over foreign direct investment or high interest rates is meaningless; what is required is some tough action on the fiscal deficit, revenue deficit, trade deficit and the current account deficit. If you keep over-promising and not delivering, then the charm fades away. If we start delivering on a few, you will be surprised at the positive inflow of capital again, given the domestic demographic shift and the consumption boom in the country", he adds. Getting the investment back on track is right on top of his policy agenda, as private capital expenditure has been one of the lowest in the last 8-10 years.
KKR India, in any case, is not a big believer of investing in listed companies. Ask Nayar and he agrees: "If we have to because India has so many listed companies, that's a different issue".
On top of his favourite list of investments is consumer-facing companies, healthcare, financial services and industries which derive demand from infrastructure and industrial spending. And, KKR prefers to deal in private companies as much as possible as "anyone can buy listed stocks". That, he says, isn't difficult as he had relationships with 200 corporate firms in India when he left Citi.
These are coming handy now, even if it means "working in double shifts", from 8 am to the evening and then continuing on till very late into the night.