’Insolvent Companies Are Trading At A Premium’

By Shrija Agrawal

  • 18 May 2012
’Insolvent Companies Are Trading At A Premium’

Narayan K Seshadri, chairman and CEO, Halcyon Resources and Management Pvt Ltd, believes in putting his faith in distressed assets. Halcyon, established in 2004, started as a workout group to build valuable businesses by turning around or turning up the performance of stressed assets. The man, who is credited with turning around KPMG Consulting in India, is on the road to raise a maiden $200-million distressed assets specialist fund. In an interview with VCCircle, Seshadri talks about fund-raising, investment strategy, sector focus and the distressed investing scene in India.Excerpts:-

What made you think of setting up a turnaround fund?

Initially, my partners and I invested our money to turn around assets. We made some very good returns too. In 2006, we were asked by a lot of people to manage their money. We partnered with US-based hedge fund investor Baupost Group LLC, which believed in value investing. But, after the market meltdown, their focus shifted to the debt market. So, we decided to form a fund with multiple investors.


What is the fund size that you are targeting?

Our fund comprises two components, an onshore component of a $100 million and an offshore commitment of $100 million.

How will the two-fund structure help?


This will help to overcome the inability to replace domestic debt with offshore debt as ECB (external commercial borrowing) guidelines do not permit such end use. Any restructuring, if addressed from overseas, will have to be funded using equity. This makes it unattractive to both investor (risk is higher) and investee (dilution of promoter interest could be high). Similarly, rupee funds cannot fully access foreign debt of Indian companies. If FCCBs are trading at a discount, they cannot be bought using rupee funds unless certain RBI norms are met.

So, we have a two-fund structure with up to a third of each fund being available for such investments, where there are regulatory restrictions.

How is the fund-raising process coming along?


It has been bit of a hard sell since institutions are typically used to a growth fund model. This kind of a fund is relatively new and explaining our concepts (to investors) has taken time. We find interest from commercial banks which look at this as a solution to their long-term exposures. In the global markets, about six months ago, it was difficult to even get a meeting. Now, they (investors) want to meet.

When do you expect the first close?

We expect a first close of $100 million before the first quarter of the next calendar year. It would be a combination of both fund components. Till now, we have been making investments through the earlier Baupost connection.


What kind of companies would you look at?

It has to be a solid business and not something built on a temporary arbitrage. We don’t want a situation where the substance of the business vanishes either on account of technology or rapid consumer change. We look for asset-rich companies with tangible and proven intangible assets. They have to ensure strong cash flows.

What is your sector focus?


We look for a situation where along with capital and active management we can make things work. We would be open to companies in engineering (automotive and non- automotive), textiles, chemicals and food processing.

Would you look at companies in default?

Not an entity which has gone into such deep default where liquidation is the only option. We look for companies which are in deep stress because some money is locked up in contract or they have borrowed short or invested long. Over-capitalised companies or those with past debt overhang may not be able to service the debt. We try to restructure debt and bring in some equity.

Any trends in valuation that you see in distressed assets?

There are companies, who find it difficult to service debt, trading at premium when in reality they should have zero equity value. Effectively, an insolvent company is at a premium. Public markets are our biggest competition. Recently, 10 or 12 companies got money through QIP which could effectively match their cash flow deficits, replacing debt with equity. Is the equity money free? If debt itself is not serviceable and people are putting in money, when will that equity have any real value.

What returns do you expect out of such investments?

We are a little more moderate compared to growth funds. Since we work with stressed situations, we see to it that each of our investments is properly safeguarded. We look at an IRR of 25-30%. While we want the upside to be unlimited, we don’t forgo the downside protection for a very high upside. We certainly would want 25% or above IRR.

How would you describe investing in distressed situations?

Individual entities can be structured better for higher growth. There are businesses which look good from outside. Peel a few layers and you find that while they have the foundation for growth, they may need to rectify even the capital structure or nature of transactions.

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