Merisis advised IARC on this transaction.
US private equity firm Blackstone Group LP has set its foot in India’s distressed asset space with a majority stake in an asset reconstruction company (ARC), two people familiar with the development told VCCircle.
Blackstone has bought a majority stake in Mumbai-based International Asset Reconstruction Co Pvt Ltd (IARC), the people mentioned above said. “Blackstone, through its opportunistic investments arm Tactical Opportunities or Tac Opps, has picked up a 51% stake in IARC, while the rest stays with investors, including HDFC Bank, Tata Capital Financial Services and ICICI Bank,” one of the person said, adding that the deal was sealed recently.
The other person said that City Union Bank, FMO Netherlands and Standard Bank Plc, UK, have exited their investments in IARC through the control deal. The three investors held around 25% stake in IARC before the transaction.
Separate email queries to IARC and Blackstone spokespersons, seeking details on the transaction, did not elicit any response till the time of publishing this report.
However, in a recent interview with VCCircle, Blackstone’s senior managing director Amit Dixit had said that the firm had taken control of an asset reconstruction company in India and had set up that platform.
“The strategy would be to buy loans and that is already up and running. It would be a two-pronged strategy – if a loan is available through any of the banks, we will buy from the ARC platform, but if a company is available, like in one of the bankruptcy cases, we would do that from our private equity platform. That’s how we have planned to go about distress (asset class).”
He had, however, not shared the details and name of the ARC back then.
With this, Blackstone, which had so far invested in the Indian private equity and real estate space, has added a new asset class. The PE major had invested about $6 billion (Rs 39,037 crore) in India since 2005. Of this, nearly three-fifths has gone into PE deals and the remaining in real estate.
Interestingly, Blackstone’s peer KKR had earlier sought to enter the stressed assets space in the country with a stake in IARC. However, it chose to scrap the deal and eventually set up a new ARC – the first such fully foreign-owned firm.
Earlier, Mint had reported citing sources that Blackstone is in talks for a deal with IARC. However, it had said that the PE firm will first pick up a minority stake in the company.
IARC bets big
Arun Duggal, the former managing director and chief executive officer of Bank of America in India, had set up IARC in 2002, along with MS Verma, a State Bank of India veteran.
According to the company website, with offices in Mumbai, Gurugram and Chennai, IARC aims to carve out a niche for itself, helping in the revival of sick units with turnaround potential, and optimising resolution of non-performing assets.
Between 2012-13 and 2014-15, IARC’s revenue grew substantially from Rs 15.56 crore to Rs 33.50 crore, while its net profit rose to Rs 4.41 crore from 1.31 crore, during the period. Subsequently, in the following fiscal year, the company’s revenue dipped to 31.82 crore, to recover slightly in 2016-17 to Rs 32.84 crore. Its net profit, however, rose substantially to Rs 6.22 crore in the fiscal year ended 31 March 2017.
Its institutional investors include HDFC Bank, Tata Capital, City Union Bank, FMO, ICICI Bank and Standard Bank of UK.
The development comes at a time when India’s non-performing assets and restructured loans stood at Rs 9.46 lakh crore, or 12.2% of total advances, as of September 2017. The central bank’s revised framework puts another 3.5% of total advances, classified as SMA-2, at the risk of becoming NPAs.
The RBI has also been introducing new norms for ARCs to encourage cash-based acquisitions. It had hiked the minimum net-owned funds for ARCs to Rs 100 crore from Rs 2 crore, and had directed banks to continue to provide for the loans sold, if they held more than 50% (10% from 2018-19) of loan value in SRs.
Besides, the government has also allowed 100% FDI in ARCs, allowing them to raise the necessary capital to address the size of the NPA problem.
With regulatory arbitrage on provisioning now gone, banks are increasingly looking for cash-based transactions. This will require ARCs to have access to higher quantum of capital and capabilities to handle and resolve complex NPAs in a time-bound manner.
Recently, Aditya Birla Capital Ltd, the holding company of the group’s financial services interests, said that it was likely to foray into the asset reconstruction business.
Some of the global firms, which have set up partnerships to invest in stressed assets in the country, include Canadian pension funds Caisse de Dépôt et Placement du Québec (CDPQ) and Canada Pension Plan Investment Board (CPPIB). Alternative investment firms Bain Capital, Oaktree Capital, Brookfield Asset Management and J.C. Flowers & Co have also marked their presence in the space.
US private equity firm JC Flowers & Co had floated a joint venture with Ashok Wadhwa-led investment bank Ambit Holdings Pvt Ltd to acquire stressed assets in India. Financial services firm SREI Alternative Investment Managers Ltd, which is part of Kolkata-based SREI Group, had also announced its plans to float a Rs 2,000-crore fund to invest in debt instruments of stressed companies.
Blackstone’s Tac Opps unit
Globally, Blackstone’s Tac Opps unit, led by David Blitzer, has a team of 60 professionals who identify and execute differentiated investments on behalf of other investors. As its investments typically fall outside traditional alternative investment categories, the unit aims to deliver less correlated returns and lower volatility across its portfolio, as per its website.
The unit was started in 2012 and already has assets under management of about $22 billion. Tac Opps had capital inflows of $5.9 billion in 2017 and with 15% appreciation, its second best year on record.
Among the nine major PE funds run by Blackstone, Tac Opps churned out one of the best net internal rate of return (IRR) of around 13% for the year ended December 31, 2017.