Stressed funds attractive idea for yield-seeking investors: Nitin Jain

'We do not see this as a one-time tactical opportunity but think of this as a structural opportunity,' he said of the ARC business

Edelweiss Alternative Asset Advisors, the alternative asset management arm of Edelweiss Group, is raising a $300 million fund to invest in stressed assets. NITIN JAIN, CEO of Global Asset & Wealth Management at Edelweiss Group, explains to Ranju Sarkar how stressed funds work and why they are attractive for yield-seeking investors.

How does a stressed asset fund work conceptually as a debt fund. How is it different than a debt fund or a PE fund, in terms of yields?

Though the fund does buy NPA from banks, but since it is buying them at haircut we expect it to make more than a debt fund. Also, when we are buying an asset which is stressed,  there is collateral attached to the existing debt structure, which provides us good protection for our investment. The transaction is structured in a manner to create equity like returns with significant downside protection.  The fund invests in the following type of deals:
 

What makes it attractive for yield-seeking investors? How does it fare with venture debt funds in terms of returns, holding period?

Unlike classic private equity which also seeks high teen return, the (stressed assets) fund tries to deliver similar return with far more predictable cash flows on a yearly basis because you are investing in the debt of the underlying companies which basically provides a reasonable yield for the end investors. These are funds that aim to deliver a cash coupon in the range of 10-12% even on a running basis besides the capital appreciation in the end of the fund. Hence it is a very attractive proposition for people who are looking for yield.

This is very different than venture debt, because venture debt is for companies which are in a start-up phase and new-gen, whereas we invest in companies which are asset heavy and collateralised.

What's the opportunity in the stressed assets business? What kind of bad assets can be bought and turned around?

The total amount of stressed & distressed asset in India according to various estimates is around $200 bn. The entire regulatory machinery including the government and the banks is committed to solving this problem. A lot of steps have been taken to fast forward the resolution process -  IBC has been a shot in the arm.

In this entire mechanism, one of the key ingredient is capital which is in short supply, along with the skills and teams which can acquire and help companies turn around. Edelweiss as a platform has more than a decade of experience in doing this business and is well positioned to capitalise and help quite a few of these companies. 

There’s opportunity to acquire a lot of these assets at attractive prices and hopefully helping these companies come out of the stress situation, thereby helping the banks recover their debt and in the process also make meaningful returns for the investors. The good part is that they are also very well collateralised that even if the hypothesis does not play out, we are very well protected on the downside because of the underlying collateral. This presents a very good risk-return opportunity in the current time.

There are other asset reconstruction companies (ARCs) and other foreign funds who have been trying to participate in this opportunity. Currently, Edelweiss is a dominant player in the market and I don’t think currently there is any other platform which allows Indian high net worth clients to participate in this opportunity.

How do you plan to turn around these assets & generate returns?

One of the misconceptions that people have is that a lot of these assets are dead assets, but reality is that a lot of these assets are operating and delivering positive EBITDA. The problem is not demand for the product or quality of the asset, but their broken balance sheets. A large part of the problem is solved once we are able to buy the debt at a sustainable level and restructure it to match the cash-flows.

The second point here is that we try to augment the management and helping them manage the cash flows better. We have created an operational turnaround team for working with managements of these companies. They assist on various aspects of the company from cash flow monitoring, project management, operational management. There are classic case studies like the paper company or the port in our portfolio which we have been able to turn-around.  

You are the biggest player in the ARC business. What's been the experience? 
 

We have been running the business for more than 10 years and it is a core business for us. We think it is a very big responsibility for us to not only help the banks but also help our portfolio companies. We are committed to this business from a long term point of view, and probably are the only Distressed investing team in the county with a full-fledged turnaround team. So far we have had a great experience in this business and have more than 100 people working in this vertical. We do not see this as a one-time tactical opportunity but think of this as a structural opportunity.