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Credit An Interesting India PE Strategy : Nirav Kachalia, Morgan Creek

28 March, 2012

CX Partners, a Delhi-based private equity firm founded in 2009 by former Citigroup Venture Capital International (CVCI) managing director Ajay Relan, is targeting $300-350 million as a starting point for its India-specific Intermediate Capital Fund, focused on Special Situations, according to Nirav Kachalia, managing director of Morgan Creek Capital Management, a Limited Partner in  CX Partners.

In its first media interaction on the subject, Kachalia talks about the fundraising, team, strategy and the genesis of the new NBFC-type strategy for CX Partners. According to him, fundraising for the new debt side practice of CX Partners has just started. “We have just started and it’s still very early. But people who know India can easily understand the strategy. It’s a strategy that fits the structural constraints, the promoter’s mindset and really resonates with people who know India. Of course, we may have to educate people as it is all about creating new ways of thinking when it comes to investing in India.”

The Team

It will be an independent team based in Mumbai as opposed to Delhi. According to Kachalia, CX Partners provides a platform which can be leveraged to access healthy and strong businesses. 

“What we want to leverage from a CX perspective are strong promoters and businesses. As an investor, I want to access growth in India and access that in multiple ways. Having interesting high-risk returns in different ways is of great interest to me.”

Strategic Sense 

The new fund will take the total AUM (assets under management) of CX Partners to close to $1 billion and act as a multi-asset solution provider – catering to all the investment needs of the promoter, both debt and equity. Kachalia asserts that such an offering is also strategic as it “allows CX to offer yet another solution to partners in case it is required, as opposed to losing businesses as they might not be the perfect partners for equity capital. And in many cases, some of the best management teams don’t want to part with their equity.”

The fund will look at all types of financing, including distressed balance sheets, mezzanine and last-mile financing, for recapitalisations and acquisitions.

“It is a good combination which will help one access healthy businesses – businesses, who for one reason or another, don’t feel excited about private equity. There may be valuation gaps or unwillingness to dilute stake or give away control. So if you can go to that business and say that we are happy to take a little less return but at the same time, would protect our risks – that can be a very interesting risk-return for us as a firm. But one must act pretty quickly when playing by that strategy.”

The Genesis

Kachalia is extremely involved in this initiative of CX Partners, almost as a co-partner would be. In fact, he approached the private equity firm with the idea to develop it more on the lines of a joint venture between Morgan Creek and CX Partners. He has helped develop the business idea from the beginning and will also serve on the board of the investment committee. 

“This kind of involvement is there because I am really interested in exploring this area. The concept of credit opportunity came to my mind way back in 2005 when I was with Wilbur Ross fund and managing the other side of the balance sheet.

It was a unique idea at that time and I have learnt that distress does not exist in India as we think about it from a western perspective. So it becomes difficult to access distress that way. But the idea of accessing the other side of the balance sheet and providing capital that may look like credit in some capacity was an interesting concept.

I have been thinking about it and trying to understand how others have approached this opportunity. And from that perspective, I help develop the business case from the beginning. And just like we have done in the west, we have decided to partner with someone, as opposed to starting it ourselves. Especially partnering with someone who has great experience and the platform is highly leverageable in this market. So we have approached CX and asked it to think about this idea as a JV, so to speak, with high operational responsibilities falling to CX as a firm and a new independent team.

On a personal basis, I am involved in everything up at this point – right from getting the fund going and my firm is introducing it to potential investors as well. In the long run, I will serve on the off-shore investment committee, which will help me get a first-hand look at the companies.”

A Multi Asset Solution Provider

Having a debt piece to their asset management piece is a strategy being actively pursued by PE funds. For instance, Kohlberg Kravis Roberts & Co. (KKR), one of the world’s largest private equity firms, started offering debt finance to Indian corporations last year. Globally, PE funds like Blackstone Group L.P. and Oaktree Capital Management L.P. do provide debt financing. Late last year, private equity major 3i Group also forayed into debt funding in India and it now plans to lend to Indian tier II and tier III corporate houses. Recently, three PE firms – the private equity arm of Goldman Sachs Group Plc., Everstone Capital and Beacon India Private Equity – set up an NBFC called Indostar Capital Finance Ltd. These three PE firms will also hold a majority stake in Indostar.

CX Partners currently manages around $515 million under private equity. Key investors in the firm include Morgan Creek Capital, Goldman Sachs, JP Morgan, Asia Alternatives and Adams Street. Its key investments include buying 8 per cent stake in steel company Monnet Ispat for Rs 150 crore from the secondary market, acquiring 20 per cent stake in NTL Electronics India Ltd for Rs 120 crore and around Rs 188 crore in Thyrocare Technologies for the acquisition of 30 per cent stake.


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Credit An Interesting India PE Strategy : Nirav Kachalia, Morgan Creek

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