MUMBAI : The private equity debt financing market has seen a significant shift in recent months, with private equity firms making larger acquisitions, with valuations steadily rising since last year. In an interaction with mint, Shantanu Sahai, Managing Director and Head of Debt at Nomura, explained how the Japanese investment bank is stepping up its debt business thanks to growing deals from private equity firms in India and new products emerging in this space. Private equity firms use debt in addition to equity to make acquisitions, as this lowers their overall cost of capital, thereby improving the potential return they can generate, while also allowing them to make larger acquisitions. . Edited excerpts:
What kind of growth has Nomura’s debt business seen in recent years?
In March 2016, when we had just started our debt business, we managed a single transaction with a single digit million dollar balance sheet rollout and revenues of a few thousand. But the business has grown considerably over the past five years and before Covid in March 2020 our balance sheet had grown 100 times and our revenues 125 times. Today, 8 out of 10 transactions executed in the Indian market by Global Tier I financial sponsors include Nomura. We’re also one of three or four shops across the street that offer the full line of debt financing and risk management products to the world of financial sponsors. The CAGR of rolling out our balance sheet and revenue over the past five years is over 100%. And despite this aggressive growth, the total cumulative delinquency, which corresponds either to delays or to defects over this entire period, is zero.
We closed six deals in the last quarter and we have a pipeline of nearly 17 more deals for this year. We had significant repayments in the first and second quarters of the previous fiscal year, mainly due to stock market volatility which triggered repayments in our margin loan portfolio which we then redeployed in several transactions concluded in the first quarter of fiscal year 21-22. We plan to double our balance sheet in the next 12 to 18 months.
Do you think buyout and M&A activity will increase significantly in the future?
We anticipate that over the next 12-18 months we are likely to see an unprecedented level of M&A activity due to both financial sponsors deploying more capital in the country as well as the theme of consolidation. in all sectors and therefore the financing of private equity fund activities in India through not only the old favored sectors but also an enlargement or enlargement of the sectors. So, for example, we find that private equity activity has traditionally remained in healthcare, consumer financial services, but now we also see industrial projects, automotive components, renewable energy and in a certain measurement of annuity projects.
Private equity firms have recently taken on larger debt to fund their buyouts. What is driving this trend?
Between November and March, there was a strong demand for financing acquisitions in the unlisted sector, as while listed valuations had risen significantly, valuation expectations on the unlisted side were still reasonable. But after March that changed and even on the unlisted side, promoters started looking for valuation multiples comparable to listed peers. So a private equity fund that previously paid, say, 20 times the valuation of EBITDA, now had to pay 25 times or 30 times. At 20 times the Ebitda, they borrowed 4-5 rounds of that of banks at 6.5-8.5% which would lower their weighted average cost of capital, but with increasing acquisition multiples, these 4- 5 rounds became less meaningful for funds and their borrowing demand increased proportionately to 6-7 rounds of Ebitda while paying higher returns.
How has this change impacted the acquisition finance market?
This change has resulted in a significant shift in the leverage market. Previously, acquisition financing was underwritten by banks like ours and placed in the commercial banking space in Taiwan, EMEA, Australian and Southeast Asian banks, etc. deferrals, higher operating leverage and higher subordination make commercial banks unable or unwilling to subscribe to this paper in accordance with their own risk / investment policies.
As a result, the entire universe for selling these types of loans has shifted from commercial banks to credit funds and other participating institutional investors. This is an institutionalization of the leveraged acquisition and financing space that has occurred across the board over the past three to four months. This change happened for the first time in India. This is a new product on the block called unitranche and currently very few banks are meeting this market need. There are only two to three banks in the market, including Nomura, that offer these unitranche loans to clients. This is explained by the ability of a bank to offer this product based on its ability to subscribe and then to spread this risk over the universe of non-bank institutional investors.
So at first glance it looks like a product, which is just a little different from the usual leveraged buyout and finance products in the sense that the leverage is maybe a bit more, the covenants are more flexible, yields are higher, duration is longer, etc., but the consequence is a product which is not likely to be sold in the commercial banking space. So it needs a whole new base of investors to sell it.
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