UTI Capital makes first close of maiden India debt fund at $74m; eyes mid-market deals

UTI Capital has marked the first close of its Rs 1000 crore ($155 million) fund by raising almost half of its targeted amount. The Category II Alternate Investment Fund has a target corpus of Rs 750 crore and an additional green shoe option of Rs 250 crore. The capital commitments in the fund currently stand at more than Rs 480 crore ($74 million).

The private sector lender is looking to provide secured loans of around Rs 60-70 crore in the mid-market segment. The company is mainly targeting the manufacturing sector where collateral for loans are easily available.

In an interview to DEALSTREETASIA, Rohit Gulati, Managing Partner at UTI Capital, talks about the plans for the maiden fund and the debt market in India.

Edited excerpts:

Can you elaborate on your fund?

UTI Structured Debt Opportunities Fund is a Category II AIF and the target size of the fund is Rs 1000 crore ($155 million), with Rs 750 crore and green shoe option of Rs 250 crore. Typically, AIF money is raised over a period of time, because you time the fund raise with the velocity of deployment. The target of the fund is to invest in senior secured instruments with some equity upside, therefore it is structured to meet the requirements of the intended borrowers and also structured to ensure that we generate returns for our investors. The first close happened last week at around Rs 480 crore ($74 million). We’ve got a good set of institutional investors both from India and overseas and also family offices.

What is your deployment strategy for this fund?

Our primary underwriting is going to be on the cash flows of the company. Since we’re not going to be doing unsecured lending, it will be a combination of cash flows and assets. What we also look at is the company’s behaviour with lending institutions previously. By defining these parameters, the manufacturing sector and brick and mortar become a play for us. We’re not averse to looking at services companies but the typical problem with them is that you can’t see assets. Unless the promoters provides his own assets we can’t look at that. Similarly in consumer businesses, typically, the brand would be the most valuable part of the business and it’s not really asset heavy. We believe in having tangible assets as primary security, so we’re not ruling services companies with promoter-driven assets. By defining the kind of instruments that we’re going to invest in, manufacturing becomes a main play.

Is there any average size of debt that you’ll look at?

This is a Rs 1000-crore fund and we’re targeting around 15 deals in this fund. So, the average investment would be around Rs 60-70 crore, which will be our median ticket size. Having said that, we can look at lower ticket sizes given that this is our first close and once we reach our final close we could go up to Rs 150 crore. As per our filing with SEBI, the maximum investment in one deal will be 15 per cent of the fund size. However, it is likely to be more sub-Rs 100 crore, most likely in the range of Rs 70-100 crore.

By when do you plan to reach a final close?

As per our filing, we have one and a half years of fund raising. And with our first close. without the green shoe, we have raised almost half of our fund. Velocity of deployment will also define the velocity of fund raise. The demand is there so we will probably deploy first then come to the market for the next close. It could be the end of this financial year (March end), however that is totally dependent on the market situation.

Did the fund draw interest from domestic investors? What is the participation of foreign investors like?

It’s an equal split between both domestic and foreign investors, from whom we got a fair amount of demand as well.

Given the growing stressed assets, how do you assess the demand for debt from an AIF point of view?

Banks have been pretty slow. Even though recapitalisation is happening, it will take some time before they come back into the market in the same fervour as they were a few years back. NBFCs have taken a lot of space that the banks have left. Wherever a situation requires a structured solution where you need  to adapt the instrument in accordance to the requirement of the company be it on the cash flows or the way the money has to be given, whether it’s the holding company or the financing company, in the space of Rs 50-100 crore debt there are not many options in the market. Most of the guys that were there in the structured finance space are those that write bigger cheques, such as KKR, Edelweiss. Everybody talks about millions of dollars no one talks about crores. When you look at the bigger ticket size, there are many options, but when someone wants Rs 70 crore debt, there are not too many players who are happy to work with them and given them structured options. We are dependent on situations which require our kind of capital and in that area I don’t think the competition is much.

How do you view the next year or so for UTI Capital?

We have identified a niche, where competition is limited. Before the banks come back to the fervour they had three-four years back, this segment will continue to be very relevant both for lenders and borrowers. Also, it must be pointed out that a lot of companies in the manufacturing space that require growth capital of around $10 million are not getting private equity funding. So either you have buyout funds, or those that write very large cheques. So this mid-level space will be there for at least few years and the arbitrage opportunity will be there in the ticket size that we’re targeting. This small ticket size is panning out well for us, which is why we haven’t raised a much larger fund. We’re building a fund where we can do around 15 deals and once we’ve proved ourselves with those, we will think of a second one.

Now that you’ve made your first close, have you started deploying the fund?

We are now working through term sheets. Along with raising a fund, we were looking to build a pipeline simultaneously. In the last one week, we have already issued one term sheet. So that process has started and we are now in the mode of investing.

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