OTPP Bolsters Its Exposure to India's Credit Markets

ETBFSI News reports Ontario Teachers’ partners with Edelweiss to invest $350 million in distressed opportunities:

Ontario Teachers’ and Edelweiss have partnered to invest $350 million with focus on performing and distressed opportunities in the Indian credit investment space.

Edelweiss Alternate Asset Advisors’ (EAAA) the largest debt manager in India with AUM over $3 billion will focus on the investment opportunities in the distressed private credit investment opportunities.

Rashesh Shah, Chairman and CEO, Edelweiss Group said, “This partnership comes at a time when there is a thrust towards empowering and enabling India to become a global manufacturing hub as vocalised by the Government’s ‘Atmanirbhar – self reliance’ vision. The need for long term patient capital in India presents a huge opportunity for private debt managers. At Edelweiss, we have built deep capabilities in this space and I am honoured by the trust placed in us by the highly respected Ontario Teachers’ team.”

Gillian Brown, Senior Managing Director, Capital Markets at Ontario Teachers’ said, “We are pleased to enter into a long-term partnership with Edelweiss Group, which has a proven track record and demonstrated ability to originate, underwrite, structure and realize on private credit investments in India. This partnership will further expand our presence in, and provide additional insights on, the important Indian market.”

Ben Chan, Regional Managing Director, Asia Pacific at Ontario Teachers’ noted, “We are excited to invest with Edelweiss to bolster our exposure to the Indian credit market.This is an important milestone in our ambition to build multi asset class exposure to India’s long-term growth story.As a global investor, Ontario Teachers’ hopes to leverage our select list of partners including Edelweiss for local insights and acumen as we navigate to grow profitably in this important market.”

EAAA is the largest private debt platform in India as a part of Edelweiss Asset Management business. The Ontario Teachers' Pension Plan Board (Ontario Teachers') is the administrator of Canada's largest single-profession pension plan, with $204.7 billion in net assets (all figures at June 30, 2020 unless noted). 

Swaraj Singh Dhanjal of livemint also reports Edelweiss' arm to get $350 million from OTPP:

Canadian pension fund manager Ontario Teachers’ Pension Plan Board (OTPP) has agreed to invest $350 million ( ₹2,600 crore) in Edelweiss Alternate Asset Advisors (EAAA), the latter said on Wednesday.

The investment pact represents a long-term partnership between OTPP and the alternative investment platform of the Edelweiss Group, which will focus on performing and distressed credit investment opportunities in the Indian market, it added.

“The focus of the platform is on credit and yield products. We have four products under our alternatives platform - performing credit (corporate and real estate) distressed credit and infrastructure yield. We started this platform 10 years ago with our first performing credit fund Edelweiss Special Opportunities Fund, for which we had raised $230 million," said Venkat Ramaswamy, vice chairman and executive director, Edelweiss Group. “Now, we have around $3.8 billion in assets under management including ESOF III commitments received recently," he added.

OTPP is the third major global investor to tie up with Edelweiss’ alternatives investment business. Canadian pension fund CDPQ and European insurance giant Allianz are the other investors.

Ramaswamy said EAAA is likely to raise a new fund every year. The announcement follows the recent deal between Edelweiss and PE firm PAG, which infused ₹2,200 crore for a 51% stake in the Group’s wealth management business.

India's Business Standard also reports Edelweiss arm secures $350 millionn investment from Ontario Teachers' Pension:

Edelweiss Group on Wednesday said it secured an investment of $350 million from Ontario Teachers’ Pension Plan Board, Canada’s largest single-profession pension plan, in its alternate investment arm.

The investment, about Rs 2,600 crore in rupee terms, will be deployed in Edelweiss Alternate Asset Advisors’ (EAAA), a platform that manages about $3.8 billion of assets under management in performing credit, distressed credit, and infrastructure yield funds.

EAAA is part of Edelweiss Asset Management, which manages customer assets of about Rs 1 trillion across alternatives, mutual funds and distressed assets. The fund will be utilised to “focus on performing and distressed private credit investment opportunities in the Indian market,” Edelweiss said in a statement.

Global companies that have invested in EAAA include Caisse de depot et placement du Quebec (CDPQ) and Allianz Investment management.

Indeed, I've already discussed why CDPQ is investing in India's financial services, expanding its partnership with Edelweiss Group, a partnership that began in 2016. 

OTPP is also investing in Edelweiss Alternate Asset Advisors’ (EAAA), a platform that manages about $3.8 billion of assets under management in performing credit, distressed credit, and infrastructure yield funds. 

As Venkat Ramaswamy, vice chairman and executive director, Edelweiss Group, states:

“The focus of the platform is on credit and yield products . We have four products under our alternatives platform - performing credit (corporate and real estate) distressed credit and infrastructure yield. We started this platform 10 years ago with our first performing credit fund Edelweiss Special Opportunities Fund, for which we had raised $230 million," said Venkat Ramaswamy, vice chairman and executive director, Edelweiss Group. “Now, we have around $3.8 billion in assets under management including ESOF III commitments received recently," he added.

That tells me they know what they're doing and are growing this platform very nicely but carefully, always maintaining alignment of interests and focusing on returns.

In terms of this investment from OTPP’s perspective, Gillian Brown and Ben Chan explain it well:

“We are pleased to enter into a long-term partnership with Edelweiss Group, which has a proven track record and demonstrated ability to originate, underwrite, structure and realize on private credit investments in India. This partnership will further expand our presence in, and provide additional insights on, the important Indian market.”

“We are excited to invest with Edelweiss to bolster our exposure to the Indian credit market. This is an important milestone in our ambition to build multi asset class exposure to India’s long-term growth story. As a global investor, Ontario Teachers’ hopes to leverage our select list of partners including Edelweiss for local insights and acumen as we navigate to grow profitably in this important market.”

In late July, I discussed pensions' love-hate relationship with private debt, but I caution you, it's a different game in growth markets.

Specialized credit platforms like this aren't exactly burgeoning in India, you need to find groups that really know what they're doing and the people managing these platforms need to be plugged into the right people to capitalize on the best opportunities.

No doubt, Mr. Ramaswamy is plugged into the right people. You can read all about Edelweiss here to get a great overview of their business lines but I recommend you read this 2015 Forbes article on how Edelweiss built a business for the long run to really appreciate why Edelweiss Group is a leader in India's financial services.

Investing in India's credit markets, however, isn't without risks. At the beginning of the year, before the pandemic hit, KKR infused $150 million 'confidence' capital in India NBFC arm:

US buyout group Kohlberg Kravis Roberts (KKR) is making a fresh equity commitment of $150 million, backing its wholesale non-banking credit arm KKR India Financial Services (KIFSL) that has been buffeted by rising bad loans in its portfolio, ratings downgrade, personnel changes, strategy overhaul and repayment pressures. 

This is the second time the parent is infusing ‘confidence’ capital after putting in $100 million in 2009, when the PE group launched its credit business in India in what was then hailed as a pioneering strategy. Till date its other investors Abu Dhabi Investment Authority (ADIA) and Texas Teacher Retirement System have each infused $100 million. 

KKR will fund its commitment to KIFSL through the firm’s balance sheet. “This is a demonstration of the confidence KKR has in the franchise and in its India business,” said Sanjay Nayar, CEO, KKR India. “The fund infusion will help consolidate our balance sheet as well as grow the book. The demand for alternative credit in India is still very high.” 

In the last decade KKR’s loan book has grown to nearly Rs 5880 crore making it one of the largest corporate-focused shadow banks in the country. In 9 years, it has been involved in $6 billion of financing for corporate India and it's promoters. But with several of its bets going awry, the firm has been under severe scrutiny. 

NCD Repayments Due in 2020 

Nayar admitted that KIFSL will also modify its risk and underwriting standards going forward and some overhaul is expected on dealings with related-party transactions and a coherent strategy to coexist with other lenders. 

“We took the medicine early but we don’t have a definitive answer on how the strategy will evolve because the ecosystem itself is evolving. But we have learned lessons which we take with us as we look to the future,” he added. 

The capital infusion also comes at an opportune time since Rs 1,200 crore of NCD repayments are due in 2020, a bulk of which are coming up between February and April. 

KKR is understood to be seeking a $200 million relationship loan to repay the upcoming commitments and bolster the balance sheet. Sources in the know said that mutual funds have also written to KKR founder Henry Kravis expressing their concern over the India business. KKR declined that such a letter was sent. 

“All maturities on its due date will be absolutely met, there is no question about it,” said Nayar. “This narrative only goes up because the market is nervous after the high profile wind-downs of other nonbank lending names in the market. MFs at this time are considering how they will invest their own money in this environment. No letter has been sent to the most senior members of our firm on this.” 

The bondholders include DSP Mutual Fund, Franklin Templeton, HDFC Mutual Fund, ICICI Prudential Mutual Fund, Nippon India Mutual Fund, SBI Mutual Fund and UTI Mutual Fund. 

“KKR is one of the most prestigious private equity firms in the world and I do not think that there would be any problem in repayment of the dues owed to any lender,” said Hemendra Kothari, chairman, DSP Investment Managers. “The India venture is 51% owned by KKR Global and that is why investors had bet their money on this venture.” 

Sources in the know also suggested that an RBI audit in December had verified the health of the business. 

KKR’s NBFC has faced flak for backing companies as diverse as Café Coffee Day, CG Power, Kwality Dairy, Sintex, GMR, JBF Industries, Amtek Auto, Resonance Eduventures and Flexituff, among others. Close to a third of its portfolio has been under stress while as much as half of the 30-odd deals it has pursued in the last few years is estimated to have soured which led to a downgrade by Crisil last October. 

“In fiscal 2019, the company witnessed slippages of three accounts, of which they managed to recover from two, and had fully provided for the exposure towards the third. The reported GNPA (gross non-performing assets) remained at 2.0% as on June 30, 2019,” Crisil analyst Krishnan Sitaraman wrote last October. “While the reported GNPA metrics have been low so far, the potential stressed accounts in the portfolio has increased significantly in the recent past, some of which are already in various overdue buckets. Crisil notes that some of the recent stress in a few accounts manifested due to unexpected events and challenges linked to fraud and governance. Additionally, with over 60% of the portfolio still under moratorium (excluding early prepayments), some more accounts are susceptible to slippages going forward.”

KIFSL provides Indian businesses with financing solutions such as loans against shares, last-mile financing, M&A funding etc. 80% of its exposure are on its books while the rest are syndicated down to other lenders and its alternative investment funds. 

As you can read, alternative credit in India isn't easy, even KKR's NBFC has had issues lending to various companies and close to a third of its portfolio was under stress, and that was before COVID hit India.

OTPP's $350 million (₹2,600 crore) investment in Edelweiss Alternate Asset Advisors is a bit different but there are risks involved in financing any deals in India during this period of uncertainty.

That's why you need strong partners in India and other growth markets, you will experience ups and downs and you need strong partners to carry you through the difficult times. 

This week, I discussed OMERS looking into Asia-Pacific infrastructure, BCI, GIC, and Brookfield acquiring Reliance's Indian telecom business, and CPP Investments expanding its Brazilian multifamily joint venture with Cyrela to include Greystar. And now OTPP’s investment in Edelweiss.

In all cases, partnerships are critical to ensure the long-term success of these investments. 

OTPP's CEO told me again recently when I covered their mid-year results that "the focus remains on international expansion, especially in Asia, investing alongside our partners and finding disruptive companies there and elsewhere." 

There is a reason why OTPP is opening up an office in Singapore, it will be another Asian office (after Hong Kong) where they can focus on expanding their footprint there.

In all cases, OTPP is actively looking to partner up with the right partners to invest in infrastructure, private equity, real estate and private debt. 

Below, Edelweiss is one of India’s leading financial services conglomerates, offering a robust platform, to a diversified client base across domestic and global geographies. Customer centricity is core to Edelweiss. Being present in every financial life stage of a customer, helping them create, grow and protect their wealth, are their key lines of business.