Financial services firm JM Financial Ltd is looking to raise a $300 million distressed asset fund to tap the large opportunity from the growing pile of bank bad assets, said two people familiar with the matter.
JM Financial owns an asset reconstruction company (ARC) called JM Financial Asset Reconstruction Co. Pvt. Ltd.
“The $300 million stressed asset fund will work closely with the asset reconstruction arm, wherein the fund will help in acquisition of assets along with the ARC if needed,” said one of the two people cited above, both of whom spoke on condition of anonymity.
JM Financial has been acquiring bad loans through its ARC; one of its biggest purchases was in July 2014 when it acquired the loans owed by Hotel Leelaventure Ltd from a consortium of banks led by State Bank of India.
“It expects to participate in larger transactions going forward through this third-party fund raise,” added the second person.
In the case of Hotel Leelaventure, JM Financial ARC bought nearly Rs.5,000 crore of loans at a consortium level to turn the firm around. By the time the ARC took control of the debt, the company sold its hotel in Goa to Malaysia-based Ceres Hotels Pvt. Ltd for Rs.725 crore, and is now trying to turn around some of its other properties.
In an email response to questions from Mint, JM Financial said it does not comment on market speculation.
Banks laden with bad loans are seeking to transfer sticky assets to ARCs, who buy these at a discount. Bad loans across the 40 listed banks in India increased to Rs.5.8 trillion as of the end of March from Rs.4.38 trillion at the end of December.
Financial firms are seeking to tap this opportunity. In March, Kotak Mahindra Group tied up with the Canadian Pension Plan Investment Board (CPPIB) to launch a $525 million distressed asset fund to invest in India. The Canadian pension fund manager will have the option of investing up to $450 million in the partnership, it said.
The fund will work closely with Kotak Mahindra Group and its affiliate Phoenix Asset Reconstruction Co. Pvt. Ltd to locate opportunities in the stressed asset market in India. Kotak Mahindra Bank owns a 49% stake in Phoenix ARC.
Earlier this year, SREI Alternative Investment Managers Ltd, part of the Kolkata-based SREI Group, launched a Rs.2,000 crore fund to invest in stressed assets through the debt and mezzanine funding routes.
In an interview to Mint in April, Hemant Kanoria, chairman of SREI Group, said the fund will primarily look to invest in infrastructure assets and it would invest Rs.500 crore and above in each asset.
In March, VCCircle reported that New York-based private equity firm JC Flowers & Co. had formed a joint venture with Ambit Holdings Pvt. Ltd to launch an ARC to acquire stressed assets in India.
The report added that the proposed ARC will have a distress debt fund as well, with an initial corpus of $100 million pooled into both.
Billionaire Ajay Piramal, too, is launching a $1 billion distressed asset fund and is seeking to tie up with a partner.
Even though funds are looking to raise money, fund managers say capital is not that easy to come by.
“Investors have to go through their own detailed analysis before they invest in these funds and till now, we haven’t seen any successful case being bought over by a fund; thus, things are taking time,” said a fund manager who is raising a distressed asset fund.
This person, who spoke on condition of anonymity, added that investors are also seeking comfort in terms of understanding resolution mechanisms that are available for funds to acquire assets and generate returns.
“Everyone has started to realize that any risk capital that is willing to come to India after proper due diligence and requisite checks is welcome, as it helps reduce the burden on banks to manage stressed loans,” said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services LLP.
“A lot of foreign investors are waiting to see some form of track record to have faith before investing in the stressed loan market here. So, when a known name comes in, is able to attract needed funding and is able to turn around a bad asset, that sets a precedent for other funds to come and invest,” he added.