INDIA FOCUS: KEYNOTE INTERVIEW

RCAL

Confidently fuelling growth

Strong institutional capabilities benefit the firm as it aspires to provide investors access to
the Indian growth story through private debt

our years and 36 investments later,

Religare Credit Advisors (RCAL)
has a track record to be proud
of. The firm, with $122 million in assets
under management (AUM), has notched
up 16 exits, each of them generating IRRs
in the range of 18-27 percent.
Two years ago, RCAL was set up as a
joint venture between the management
team and Religare Global Asset Management, the $20 billion AUM multi-boutique alternative investment platform of
the Religare Group.
However, RCAL traces its roots to
2011 when Kanchan Jain, chief executive officer (CEO) and principal managing partner and her team first started
investing in private debt.
There was a big opportunity in the
Indian mid-market, remembers Jain.
The Indian private sector had witnessed
a surge through the late 1990s and early
2000s during which corporates saw
significant growth, driving capital formation and higher output.
The structured debt team at Religare,
as it was called then, typically invested
in proprietary debt transactions in midmarket corporates from the groups balance sheet which specialised in providing
finance to small- to medium-sized enterprises (SMEs).
Within a couple of years, Jain says it
was clear that the market opportunity
was tremendous and the business hugely
scalable. In order to truly meet the needs
of the Indian mid-market and to make
the most of the opportunity on offer, the
team needed to create an independent
asset management boutique that could

WE ARE EFFECTIVELY
MAKING PRIVATE EQUITYLIKE RETURNS FROM
PERFORMING, GROWING
COMPANIES WITH PROVEN
VINTAGE, BY TAKING
DEBT RISK.
Kanchan Jain

invest institutional third-party capital. As

this was going to be hard within the existing structure, Jain and her team established RCAL as an India-focused private
debt platform investing in customised
debt investments. Religare Group demonstrated their confidence in the team
by committing 25 percent to RCALs
first fund.
Despite the Indian economy growing at a good clip, and certain industries
growing at even faster rates, there was a
dearth in funding. The banks were not in
a position to meet the swelling demand
for capital, an issue that lingers today.
Indian mid-markets corporates are

20 Private Debt Investor | M a rch 2 01 6 

well established corporate entities with

good track records. The typical size
of these corporates is about $50 million-$500 million in revenue. Jain says
these are growing, EBITDA-strong companies with low leverage and yet they
accounted for only 2 percent share of
overall bank credit in India, or 4 percent
share of credit to industry. Its a hugely
underserviced segment of the market,
handing RCAL a rich niche.
The firm raised its first five billion rupee ($80 million; 72 million)
fund entirely from domestic investors.
The fund, with 21 investments, is fully
invested. Seven transactions have matured
and the proceeds recycled into new deals.
Those exits have produced an IRR of 24
percent in rupee terms, returns that even
any private equity fund manager investing
in India would be proud of.
According to Jain, one of RCALs
unique features is that it does not draw
upon the larger organisation in any
manner whether for resources, operational assistance or deal flow. RCAL is a
standalone entity that runs and manages
all the origination and investment functions on its own.
Where the firm differs from most
others is that it has a dedicated team for
proprietary deal origination, which has
allowed RCAL to manage a healthy rate
of deployment into attractive investment
opportunities for its investors.
Sandeep Adukia, managing partner
and head of origination and business
development, says that RCAL has unique
proprietary deal sourcing capabilities that
are very specific to the mid-market.
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INDIA FOCUS: KEYNOTE INTERVIEW

The majority of new deals are selfgenerated through its proprietary network including investee companies and
relationships, says Adukia. In fact, each one
of RCALs 21 transactions from its first
debt fund has been proprietary a track
record any investment manager globally
would be proud of.
RCAL prides itself in its in-house capabilities. The whole transaction management function at our firm is robust, says
Jain, and we have our own in-house risk,
structuring and legal teams who work
closely with empanelled service providers for due diligence and on-going risk
management.

PRIVATE DEBT VS
PRIVATE EQUITY
Private Debt is lower risk as it
provides stable but high returns from
all underlying investments giving
more certainty of making 18 percent
rupee returns / 15 percent in US
dollars on a portfolio basis
Debt offers a much larger pool
of mid-market companies to
choose from business owners
like non-dilutive growth capital
Private equity return targets are
higher and often depend on sunrise
technologies / products that have
short track records. Debt investments
focus on stable, more established
companies with strong execution
and repayment track records
The return pressure of equity
strategies force them to focus on a
few specific sectors, in the process
foregoing attractive opportunities
in other boring sectors
Non-dilutive customised growth
capital in the form of debt produces
equity-like returns, while creating
a significant floor and& downside
protection for returns
Interest and amortisation payments
on debt significantly mitigates risk
and reduce currency risk and allow
for hedging

Spons ored by RCA L

The firm is now ready to start fundraising for its offshore fund, for which the
primary source of capital will be overseas
investors, in contrast to the first fund
which was domestically backed.
The other emerging markets besides
India are having a hard time, says Jain.The
uncertainty enveloping a few of the other
major emerging markets such as Russia
and Brazil, coupled with expectations
that India will be the only bright spot
for growth in the coming year or two,
means that institutional investors could
up their allocations to India.
Moreover, says Jain, a significant
amount of debt is coming up for redemption in several emerging markets, so even
without an increase in the allocation to
emerging markets debt, we can expect
more capital to come to India.
Globally, a large number of institutional investors carve out their private
debt allocations out of private equity, and
this is another factor that could see more
capital come into Indian private debt, at
the expense of Indian private equity as
returns from the latter have been far from
satisfactory.
Additionally, private equitys five- to
seven-year investment horizon without
interim returns opens it up to a high
degree of currency risk. In private debt,
on the other hand, we look at periodic
distributions and amortising principal,
which average out exposure to foreign
exchange rates over the investment
period, so currency risks are mitigated,
she says. This reduces the impact of US
dollar spikes in a way that Indian private
equity cannot.
Most importantly, Jain says, we are
effectively making private equity-like
returns from performing, growing companies with proven vintage, by taking
debt risk.
By investing in companies with more
stable businesses, strong cash flows and

[RCAL HAS] UNIQUE

PROPRIETARY DEAL
SOURCING CAPABILITIES
THAT ARE VERY SPECIFIC TO
THE MID-MARKET.
Sandeep Adukia

dominant market positions, you are still

making equity-like returns because you
are still providing them with growth
capital. We are taking about 15 percent
returns from good-sized companies, she
says. Not even the US and Europe can
offer a risk-return profile as attractive as
that of Indian private debt.
But this is only a part of the story. The
more important driver for interest in the
private debt space in India relates to the
needs of the Indian market.
About 20 percent growth in bank
credit is needed per annum to meet the
capital requirements of companies, which
translates into about $200 billion. However, bank credit has been growing at a
rate of just about 10 percent per year,
which means that the shortfall is increasing each year, highlights Jain.
Assuming that economic growth picks
up over the next few years, the shortfall
will be even larger.

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INDIA FOCUS: KEYNOTE INTERVIEW

RCAL
India is characterised by moderate
levels of debt, with domestic credit to
the private sector as a percentage of gross
domestic product at just 51 percent, the
lowest among all major economies globally
(in China, for instance, this figure stands
at 134 percent). And of the relatively limited credit available in the market, most
goes to the large corporates, leaving the
Indian mid-market really underserviced.
Vis--vis the requirements, there is a
huge funding gap there, says Jain. Moreover, she points out that banks just lend
money, while with private debt platforms,
we are also talking about customised,
innovative solutions for companies, and a
lot of the banks cannot play in this area.
Jain says that manufacturing and services in India have been growing at a
cumulative annual growth rate of 8.4 percent over the last 10 years, higher than the
GDP growth rate of 7.6 percent. These
sectors have been growing faster due to a
strong private entrepreneurship culture,
in Jains view, and they represent the best
investment opportunities.
According to RCAL, there are more
than 1500 such companies in India with
an income of more than $50 million,
which are generating healthy cash flows
and are operating with moderate levels
of leverage.
Moreover, these are companies have
vintage, so it is easier to look back at
their track record and performance, says
Anupam Goenka, executive vice president
and head of underwriting at the firm.
RCAL has so far invested in chemicals,
residential real estate, financial services,
agribusiness, garments, healthcare, and
food and beverages.
We take into account all of the business and cash flow analysis along with
structuring aspects when we invest, says
Goenka. RCALs analysis of mid-market
risk is a blend involving aspects used in
SME underwriting as well as aspects

THESE ARE COMPANIES

THAT HAVE VINTAGE, SO IT
IS EASIER TO LOOK BACK AT
THEIR TRACK RECORD AND
PERFORMANCE.
Anupam Goenka

considered when assessing risk for large

corporates. This, Goenka believes, is one
of the firms strengths.
Jain expects more of the same approach
as the strategy grows. We want to identify low risk situations, and still target
20-21 percent returns in rupee terms.
Even on a dollar fund, we indicate that
we will be able to comfortably return
about 15 percent in dollar terms, she
says, confidently.
Shes comfortable with the progress
made by the firm so far, and is not fazed
by the influx of new players in the private
debt space. Instead, she says she hopes
for more players to enter the market. I
still dont think there will be a dearth of
opportunities, because the market is that
big, she offers.
In fact, she says, it will be good for
the industry if more people are doing
the same thing as it will lead to a better
ecosystem. In saying so, Jain inadvertently
reveals the confidence underlying RCAL's
private debt strategy. n

AROUND THE WORLD IN PRIVATE DEBT

In emerging markets such as India, private debt provides growth capital to
investment starved companies, significantly different from the main sources of
private debt opportunities in developed markets
In Western Europe, private debt is driven by a lack of bank credit especially to the
SME sector, particularly addressing the shortage of bank debt since the financial
crisis of 2008. These senior secured loans typically return 9-11 percent from
underlying SME risk.
In the US, higher yielding private debt often focuses on distressed or special
situations. While these investments do target 11-13 percent, risk levels are higher
and loans are either only partially secured or fully unsecured
While India has witnessed a proliferation of opportunities in the distressed
debt space, it is still essentially a market where private debt can provide growth
capital to established mid-market companies with stable cash flows. Facilities
are secured, address a structural shortage of growth capital and target returns of
around 15 percent
Private debt in India provides higher returns while offering stable better quality risk

22 Private Debt Investor | M a rch 2 01 6 

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