AIFs line up to enter turbulent debt market; 'demand for patient money'

Experts see demand for patient money, away from daily pressures faced by MFs

At least four alternative investment funds (AIFs) focused on the debt segment have applied for regulatory approvals since March, according to the data from the Securities and Exchange Board of India (Sebi).

They include InCred Capital Credit Fund Master Trust, BPEA Credit - India Fund III, KKR India Credit Trust and JM Financial Yield Enhancer Distressed Opportunity Fund I. Incred’s application was in March; the rest came in April. Experts said there were gaps in the debt market, which such alternative funds could fill.

Emails seeking comment were sent to the funds with pending applications at Sebi. Baring Private Equity Asia declined to comment. The remainder of the queries did not receive a response.

Ashish Shanker, executive vice-president and head of investments at Motilal Oswal Wealth Management, said funds focused on debt had been on the rise in recent times, following issues in the debt segment.

"Yields are higher. Promoters are in need of funding. There is a realisation that in a lot of cases such as investment in debt securities raised through loan-against-share structures, you require more patient money. AIFs don't have to report a daily net asset value like mutual funds, which means there is less pressure on them," he said.

Chhavi Moodgal, chief executive officer at Scient Capital, said the debt market currently had demand for the highest rates, ‘AAA’ paper on one end and very poorly rated paper, which offer yields ranging in the high teens.

“The middle is kind of missing,” she said. This creates the space for funds that are willing to do their own extensive due diligence and buy selectively where they see opportunity.

She gave the example of Samunnati Financial Intermediation and Services, a company in whose debt they invested when it was BB+. It has since gone through an upgrade cycle to reach BBB- despite troubles elsewhere in the market. An upgrade can boost returns for a fund.

The non-mutual fund space also offers room for customisation at the client level, said Moodgal. This means that a client can tailor his portfolio, vetoing instruments where there is discomfort, unlike MFs in which all investors typically share the same portfolio.

The debt market has been under pressure since defaults by the Infrastructure Leasing & Financial Services in the latter half of 2018. This was followed by debt issues around Essel Group, which saw issues related to money lent against pledged shares. The Anil Ambani group of companies has also faced recent downgrades. The non-banking financial company (NBFC) segment has been under pressure.

All this has meant that MFs have been cautious in allocating fresh capital. Many have seen money stuck in firms, others have had to take write-downs on their portfolios. This has made capital more scarce for companies and groups that were already troubled.

One former fund manager said the spate of negative news around those in trouble had made it difficult for them to monetise their assets. This has contributed to their issues. The presence of more sophisticated funds, which have the ability to take on distressed debt, will make the market more efficient, according to him.

The four funds have applied for a category II AIF license. The category applies to funds that don’t use leverage and include those investing in distressed assets, according to the Sebi website. Category II AIFs have raised Rs 83,554 crore and have commitments worth Rs .2.05 trillion as of March 2019, according to the Sebi data.