The Hong Kong-based distressed debt fund, ADM Capital, is close to investing in the Indian paper sector, which could give it an active equity interest in the country, joining a growing list of high profile foreign funds keen to restructure underperforming companies.
ADM Capital will invest about Rs 80 crore in the Nath group-promoted mid-sized paper company Rama Pulp & Papers, which will use the funds for capex and for future programmes, including an acquisition. ADM is learnt to have been selected from players like Bank of America, Actis and DBZ.
“We have spoken to ADM and things are expected to be finalised soon,” said Rama Pulp director Mahesh Mehta. The final ends could likely include the amount of equity stake that ADM Capital could hold in return for its investment. The Nath group currently owns about 73% equity stake in Rama Pulp. ADM Capital declined to comment on the issue.
Once the deal is tied up, ADM Capital will join a growing list of foreign hedge funds and private equity firms that have been cherry picking underperforming companies in India that they think have the potential to grow and churn profits in the next 4-5 years. Some of the funds that have targeted such companies are Citigroup, Standard Chartered, WL Ross, Clearwater and Eight Capital. “The upside for funds such as ADM Capital would be to take part in a growing sector such as paper, which mirrors the GDP growth of 9%,” said a banker.
Formed in 1996, ADM Capital advises investment funds that make principal investments in distressed companies and special investment opportunities. ADM Capital had earlier joined Asian Development Bank to raise a $138-million fund to rehabilitate distressed companies in Asia. India’s distressed assets are estimated at $55 billion (about Rs 2,53,000 crore). Distressed debt funds typically focus on companies that have either filed for bankruptcy or are likely to do so in the near future. The fund gets involved in restructuring to pull the company out from bankruptcy. Distressed debt firms often forgive the debt obligations of the company in return for equity.
Rama Pulp had to shut its unit in Vapi on directions from the Gujarat High Court due to environmental reasons. It earlier made paper from bagasse, a byproduct of sugar manufacturing. The company has since altered its production process, using waste paper as raw material.
The company plans to increase its installed paper capacity from 21,000 tonnes to 30,000 tonnes. “We are also interested in acquiring a newsprint plant to boost our presence,” said Mr Mehta, adding that this is part of the consolidation plan in the highly fragmented paper & newsprint industry. India consumes about 300,000 tonnes of newsprint annually, of which 85% is imported. Of late, foreign funds’ interest in the Indian paper sector has grown steadily.
SuperDerivatives, the benchmark for options and leading derivatives solution provider for option pricing, independent revaluation, trading and risk management systems, today announced the opening in Mumbai of a sales and support office, together with a dedicated data center, to support the company's rapidly expanding customer base in India.
The new regional office and extended local team will provide sales, support training and professional services to the hundreds of SuperDerivatives users coming from both the private and public sectors. These include ICICI Bank, HDFC Bank, IDBI Bank, Kotak Mahindra Bank, Yes Bank, ING Vysya Bank, Reliance Industries, Tata Steel, Forexserve, Greenback Forex, Bharti Airtel and Essar Group. The Mumbai office is an new addition to SuperDerivatives’ long established APAC offices in Singapore and Tokyo and future planned office locations in Hong Kong, Sydney, Bangkok and Seoul.
SuperDerivatives’ new data center server farm in India is part of its global application delivery infrastructure. These fully, redundant load-balanced data centers strategically located around the world. It will handle increased demands while providing local customers with enhanced performance and even faster response times.
“In the past two years, the number of Indian clients has grown exponentially in buy side and sell side institutions including both private and public sectors. SuperDerivatives powerful online platform is now an essential tool for corporate treasurers as well as for options desks across India," said SuperDerivatives Regional Sales Executive, Omer Hevlin. "To ensure our clients' success and provide them with the best onsite training, support and application performance possible, we are fortifying our presence with a local data center and a team of option trading and technology integration professionals.”
SuperDerivatives’ products, including real-time pricing and analytics systems, risk management systems, portfolio revaluation services, options market data portal and online trading capabilities, are used by numerous companies from both the buy and sell side. Its pricing platforms are used by almost all the banks around the world that are active in options, as well as by numerous corporations, asset managers, hedge funds, auditors and central banks.
More and more foreign institutional investors (FIIs) are coming to India. Almost everyday you have a new FII setting up shop in India. It doesn’t seem the party (Bombay Stock Exchange’s Sensitive Index) is going to stop at 14,000 levels - Head of Investor Relations with an FMCG firm.
Four years back if you had attended an investment conference organised by leading brokerage firms like DSP Merrill Lynch, JM Morgan Stanley or Kotak Securities, you would be lucky to find 20 foreign institutional investors (FIIs). This year, more than 170 FIIs participated in just two conferences organised by DSP and Morgan Stanley that were held in Mumbai and Goa in the second week of February.
In fact, JM Morgan Stanley saw participation from foreign investors double to 320 this year, with 200 people coming from overseas. "Every year, we see new investors, which explains how seriously people are looking at India. Earlier, investors came largely from Asia and the US. Now, they also come from places like Hong Kong, London and Japan," said a senior manager with a brokerage firm, who didn’t wish to be identified.
An indicator was the growing number of first-time participants. In fact, first-timers outnumbered those who have attended past meets this year. There were nearly 750 meetings between investors and companies over three days. "The scale was different," says Ridham Desai, MD & co-CEO, India Strategist, JM Morgan Stanley.
What’s driving investors is the stellar performance of the Indian stock market and the Indian economy. "The size of the market has changed. In 2003, it (the market cap) was only $100 billion; today, it is $850 billion. The market is much larger and deeper," says Desai.
In 2003, an FII with say $100 billion to invest would not have looked at India. "We have seen four major bull runs, the hedge funds are here and FIIs have expanded their team. Indian markets have been amongst the better-performing markets in the world," says a senior manager at a brokerage firm.
Also, investment options available are much wider. For instance, earlier the foreign investors only bought stocks of top 20 companies by market cap. That’s because there were only 20 companies with a market cap of $1 billion (Rs 4,400 crore) or more. Today, according to Desai, there are 120 Indian companies with a market cap of $1 billion or more. Many FIIs who would have a cut-off of $1 billion.
This was reflected at the investor conferences, which saw 50-55 corporates participating this year as against 20-25 companies that were participating four years back. In fact, the leading broking houses today track more than 100 companies. Motilal Oswal Securities tracks a whopping 230 companies. Five years back, they were tracking 15-20 companies. "This also means there are 100 great stocks to invest and even a corporate has to fight for investment," says the investor relations head of a leading FMCG major.
Consider Hindustan Lever, for instance, soon to be renamed Hindustan Unilever. Analysts have been asking investors to buy the stock as it has been trading at historically low valuations (on Wednesday, the stock closed at 195.50 on the BSE, a 12-month low). "The stock was trading at Rs 240-250 for much of the last year and a half, and is now languishing at around Rs 200. People who invested at Rs 290 have lost their money," says an FMCG analyst.
This is despite the fact that HLL has improved its performance in the last two three years, after facing slowdown in sales and profit growth since 2000-01. "Investors are not buying HLL because they have other investment options like real estate, construction. So, even if it trades below historic valuations, nobody cares for it," adds the FMCG analyst. There are other stocks like Colgate, Tata Tea or Britannia, which are trading at historically low valuations.
Also, Desai says FIIs’ risk-appetite has gone up and they are willing to look at small and mid-cap companies, who can grow their profits faster in a fast-growing economy. "Growth gets better down the cap curve as companies get the benefit of operating leverage," says Desai.
To understand what he means by operating leverage consider the hotel business, where you have high fixed costs. Now, if you have 10-storey hotel, you may not make any money if only six floors are occupied. You could break even when you sell the seventh floor. When you sell the eighth floor, the returns start to double; with the ninth floor, you get super returns. If you can sell the tenth floor, returns touch astronomical levels. "Once revenues exceed fixed costs, every additional rupee you earn goes straight into profits," explains Desai.
There’s greater participation at the investor conferences as very companies few do exclusive road shows these days, and prefer to target these conferences to meet investors. Also, organisers have tried to broaden the interest of participants by roping in a few government agencies that are delivering better performance.
For instance, JM Morgan Stanley invited Gujarat Chief Minister Narendra Modi and Railway Minister Lalu Prasad Yadav, who captivated the audience. "It is amazing to hear Modi speak. Industry needs power, water and infrastructure; Gujarat has made a lot of progress on these issues," observes an executive with a leading corporate who attended both these conferences. As long as Modi and Lalu continue to deliver, investors will keep coming back to India.
Hedge funds paid more brokerage commissions in Asia last year as the region's rising stock prices boosted trading, according to a study by Greenwich Associates.
Hedge funds accounted for 22 percent of commissions paid for trading equities in Asia excluding Japan, up from less than 5 percent in 2004, the study found. Total commissions rose to $1.2 billion last year from $766 million in 2004.
Hedge funds are switching attention to Asia, generating more profits for investment banks such as Goldman Sachs Group Inc. and Morgan Stanley as the region's stock markets rally. Hong Kong's benchmark Hang Seng Index surged 39 percent last year, while the Straits Times Index in Singapore jumped 32 percent.
``Hedge funds are staffing up in Asia, and in many cases they are transplanting traders from New York or London to Hong Kong or Singapore,'' Greenwich's Karan Sampson said in the report.
Prime brokerage, which involves processing trades and lending hedge funds money and securities, has become one of the investment banking industry's most profitable businesses.
Morgan Stanley said its revenue from equity sales and trading climbed 32 percent to $6.3 billion in the year ended Nov. 30, fueled by a third year of record results in prime brokerage.
Bear Stearns Cos. generates at least 30 percent of its profit catering to hedge funds, according to estimates by Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York.
Greenwich questioned 176 portfolio managers and 62 traders in Asia excluding Japan for its study. The investors said they expect Singapore and Hong Kong equities to return 22 percent this year, with China returning 19 percent and India, 18 percent.
Hedge funds, loosely regulated pools of capital that allow managers to partake in gains, account for as much as 30 percent of stock commissions paid in the U.S., according to Greenwich's report in July. The Greenwich, Connecticut-based company provides consulting services to investors and brokers.
At the end of last year, about 782 hedge funds were invested in Asia excluding Japan, managing $101 billion of assets, according to Eurekahedge, a Singapore-based company that tracks the industry.
To contact the reporter on this story: Patricia Cheng in Hong Kong at pcheng9@bloomberg.net
Hedge fund share of Asian equity trading has grown from 5% to almost 25% in two years driven by stock market returns that have outstripped local expectations.
Hedge funds accounted for nearly a quarter of the brokerage commissions paid on cash equity trades in Asian shares last year.
Jay Bennett, a consultant at Greenwich Associates, said: "The increasing presence of hedge funds is influencing regional equity markets in several important ways. In addition to driving up overall trading volumes and commission payments, hedge funds are also affecting sell-side strategies in Asia through their preferences and spending patterns, and could help speed the spread of electronic trading throughout the Asian countries.”
The total equity commissions paid in Asia on trades of non-Japanese Asian shares rose from $900m (€680m) in 2005 to $1.2bn last year. The increase was due to increased trading. Commission rates were almost unchanged.
John Feng., another consultant at Greenwich Associates, said: "There is widespread optimism that this growth will continue over the coming 12 months. Our data shows institutions expect robust market returns for 2007.”
Asian institutions have typically reported expectations of 8% to 9% for most regional markets, and of 14% to 15% for the markets they viewed as the strongest. For the past several years these estimates have been too low, according to Greenwich Associates. Asian institutions have adjusted their expectations upwards for 2007, predicting 18% for India and mainland China and 22% for Singapore and Hong Kong.
Hedge funds are leading the way in the use of electronic trading in Asia. Nearly half of hedge funds use some form of electronic trading strategy, compared with 34% of Asian institutions overall. More than 85% of hedge funds told Greenwich Associates they expect to use electronic trading strategies for at least a third of their overall trading business in three years time.
Bangalore-based Nitesh Estates has divested 25% stake to Och-Ziff, US-based hedge fund major, for $51 million.
This follows banking giant Citigroup’s investment of $30 million in December last, towards a $100 million special purpose vehicle that Nitesh is floating for its hospitality foray.
Nitesh Shetty, managing director, Nitesh Estates, said, “The Och-Ziff deal values our company at over Rs 1,000 crore.”
Started in 1994 by ex-Goldman Sachs executive Daniel Och and Ziff Brothers, the New York-based Och-Ziff Capital Management Group is one of the top five global hedge funds with $21 billion in assets. The stake in Nitesh Estates is the hedge fund’s first investment in India.
Primarily into high-end real estate developments in residential, commercial, retail and hospitality space, Nitesh Estates recently announced its plans to foray into the Indian hospitality segment.
The first of these ventures, involving an investment of Rs 450 crore, would be the launch of the Ritz Carlton brand in Bangalore.
A class of funds called multi-strategy or hybrid funds has sprung up in India and the people who run these funds believe they are exactly what is needed in India. These funds have both short-term money as well as long-term money and this allows them to invest in the flavour-of-the-month companies as well as companies that will deliver returns only in the long run.
The pioneer in such funds has been SAC Capital, a US hedge fund, which was started in 1992 and is an industry legend. It charges almost double the management fee that other hedge funds charge and has been known to deliver more than 40% annually between 1996-2001.
In India, people feel that the arrival of multi-strategy fund is a sign that the ‘entrepreneurs’ have entered the FII money game. Private equity got its entrepreneurs when guys like Ashish Dhawan of Chrysalis Capital, Sandeep Murthy of Sherpalo Ventures, Sumir Chadha of then Westbridge and now Sequoia, Pravin Gandhi of Infinity were able to raise money.
With the arrival of the multi-strategy funds, guys like Arshad Zakaria and Vikram Pandit have shown that FIIs too can be entrepreneur-led rather than merely institution-led like Goldman Sachs, JP Morgan, Morgan Stanley or Merrill Lynch. So how are these funds unique? Basically, it’s the way they collect money from investors. There are two popular methods: the first is separate investment pools and the second is the concept of ‘side-pockets’.
Let’s consider investment pools first. Usually in this method, funds have three separate ‘investment pools’ that their investors can choose from. The first pool has a lock-in of two years. The second has a lock-in of four years and the third a lock-in of six to seven years. The fund uses the ‘two-year’ money to invest in public markets, ‘four-year’ money for private equity and ‘seven-year’ for real estate.
This is unlike a classic private equity fund, which locks up capital for five or even seven years. Since the private equity fund has long-term money, it is difficult for them to do public market transactions, which are de rigueur in India. “My investors would be really upset if I tried to buy Infosys when it was available cheaply. I have to make sure that it is a preferential issue and that I get a board seat,” says a private equity investor.
Private equity players have traditionally, unless they are global funds, found it difficult to do real estate transactions. “The gestation periods are four to five years and if there is not enough appreciation of value or a legal wrangle then you are struck,” says a private equity investor.
But the biggest problem for a private equity investor is that each time he sells his stake in a listed company (and in India even small companies are), he has to return the money to his investors. So, if the fund buys Infosys and sells it after a year, he has to return the money to investors and that reduces the available corpus.
So how does the multi-strategy fund overcome such difficulties? Since it has investors with different time-frames, it can afford to just go out and buy a stock from its ‘two-year’ pool without insisting on a board seat. If it exits the stock after two years, it pays off the two-year investor and can then invite new investors into the ‘two-year’ pool.
If it invests in an unlisted company, it just goes ahead and uses the money from the ‘four-year’ pool and if it invests in a real estate project it uses its ‘six-year’ pool to make the investment. In some ways, the fund matches the long-term funds with long-term investments and the short-term play with short-term capital. So, a private equity fund’s problem, that of trying to invest in short-term play, a medium term investment and a long-term investment, all with long-term money is not faced by the multi-strategy fund.
Now for the ‘side-pockets’. This is a simpler method. Suppose a fund has $100 million to invest. While screening companies it finds a great real estate deal where it can invest $10 million but it has to stay with the investment for five years. Once it puts in this money, the $10 million in real estate that is considered a ‘side-pocket’ or is set aside from the rest of the fund. It’s like creating a small $10-million private equity kitty on-the-fly.
If the entire fund is returned to the investors after four years, the $10 million remains invested in that real estate company for another one year and cashed only after five years.
Not everybody is convinced about how successful these funds will be. “I think by dividing their fund into many parts, multi-strategy guys will simply fetch sub-scale returns as compared with private equity guys. I think it is fashionable to have a private equity operation and that’s why conventional public market funds have come up with his aberration,” says the CEO of a blue-chip global private equity fund.
Considering that except for Warburg Pincus, JF Electra, and Chrysalis, very few private equity guys have made money in India over the long term this novelty might be worth trying.
Matt Mongia, formerly with India-focused hedge fund shop Monsoon Capital, is launching a multi-strategy India-focused fund dubbed the Vishwas India Fund. The fund is set to launch in March with some $10 million to $20 million in initial equity.
Mongia, who focused on marketing, raising capital, operations and regulatory compliance issues for Bethesda, Md.-based Monsoon, said his split with Monsoon founder Gautam Prakash was amicable. “When I joined Monsoon, my plan all along was to assist with the first fund for whatever that lifecycle turned out to be,” he said.
“Originally, I had planned to launch my own India fund with my current partner but, for a variety of reasons, things didn’t come together, and I opted to go with Monsoon. My thinking was that being part of a fund from launch to closing would better prepare me to launch my own product.”
Mongia and Prakash had discussed launching another fund within Monsoon, but Mongia decided to branch out on his own. Prakash recently closed his Monsoon India Inflection Fund, Monsoon India Inflection Fund II and the Caymans-based Monsoon India Cayman Inflection Fund Ltd. with a combined $600 million in January.
The Monsoon funds take a private equity slant to investment opportunities, investing in small- to mid-cap companies across a wide range of industries. About one-third of its transactions are structured negotiated deals, including private investments in public equity and minority stake p.e. transactions where the funds take a 10% to 20% stakes in the acquired companies. Two-thirds of their transactions are secondary purchases acquired in the open market or through block trades.
Mongia is taking a different approach to India in the form a multi-strategy vehicle. The fund will invest in liquid, large-cap equities with a value bias, event-driven and special situations, and derivatives/arbitrage trading opportunities.
The Raleigh, N.C.-based fund will hedge its positions through the use of futures, options and synthetic shorting. “Many of the global investment banks, like Deutsche Bank or Citigroup, have an inventory of Indian equities that they will do a synthetic short against, so we’ll be able to do just about everything synthetically even though it can’t be done in the same manner as in the U.S.,” Mongia says.
Mongia has teamed up with Ajit Dayal, former founder of Quantum Advisors, India’s first equities research firm advising Jardine Fleming, Walden-Nikko India Ventures and Hansberger Global Investors, for his latest venture. Dayal will be based in Mumbai, India, with a team of three traders.
Mongia is optimistic about the Indian market in light of regulatory and corporate changes in the region. “There’s a great deal of receptiveness on behalf of the Indian government and corporations, many of which are growing at a tremendous pace but need additional financing to fund that growth,” he says.
“Many Indian companies are also more keen to have ownership of their shares distributed across a wide base of investors and are now allowing for a greater level of transparency.”
The new fund charges a 2% management fee and 20% performance fee, with a $500,000 minimum investment requirement.
New York and Mumbai-based RAS Capital Management has recently launched an Indian-focused fund of hedge funds. The RAS India Fund-of-Funds, which has onshore and an offshore version, was launched in November and was up 4.3% in its first month, 2.56% in December and an estimated 2% last month, according to public databases.
At any given time, the fund allocates to between nine and 12 underlying global mangers, many of whom are relatively unknown or undiscovered, including some that are closed to new investors. The underlying funds have a standard deviation of half of the NIFTY / MSCI India indices, according to the firm. Its multi-strategy approach combines fundamental long/short equity, PIPES, event/ risk arbitrage, multi-strategy arbitrage and distressed debt.
Co-founder Robert Rahbari likes the fundamentals and current growth of the Indian market. “We’re very bullish long-term in general but we don’t think that the equities will do 40% a year like it’s been but there are still some 20% plus years ahead of us,” said Rahbari.
“Infrastructure build-out is going to be huge for the economy and the burgeoning middle class is starting to have more disposable income, which will create a very strong domestic economy that will drive all sorts of different industries. We just love the fundamentals of a highly educated, English speaking, Democratic government, so we’re very excited long term about the prospects.”
Rahbari, who declined to disclose the vehicle’s fees and minimum investment requirement citing SEC marketing restrictions, also mentioned that the firm plans to offer more India-focused, arbitrage-specific, private equity and real estate vehicles within the next few years.
RAS was founded in June 2006 by Rohit Aggarwal, a former executive director with Oppenheimer & Company, Robert Rahbari, a former director and chief compliance officer at Ferro Capital, and Anand Sekaran, founder and portfolio manager of Wasson Capital Advisors.
MUMBAI: Hedge funds-those aggressive investment vehicles of the wealthy-have entered the Indian real estate market, and you may be clueless about it. These secretive international investors, known for their complex and high-risk trading strategies, aren’t exactly grabbing shopping malls and residential townships in Mumbai and Gurgaon. Instead, they are buying financial instruments that Indian property developers have sold to raise money from overseas markets.
And by doing this, they are indirectly controlling a slice of the country’s fiercely growing property market. No one knows how big the slice is, but bankers say close to 50 hedge funds are active in Indian realty papers in the overseas money market.
What more, these deals are happening outside the radar of Indian regulators, in offshore tax havens like Mauritius.
It’s not a one-to-one deal; Indian developers don’t sell securities to the hedge funds. They issue shares and hybrid instruments like optionally convertible debentures and preference shares to global real estate funds owned by big banks and Wall Street bond houses. The money that flows in to India is foreign direct investment (FDI), allowed under the automatic route. But in many cases, these foreign investors don’t hold on to the securities. They simply sell them to hedge funds, often within weeks after the FDI deal is done.
What’s fuelling the demand for the securities is the move by several hedge funds to diversify their portfolio. “Stocks have gone up, crude is volatile and metals have hit them badly. Many hedge funds are looking for new assets, and real estate is one,” said a banker familiar with these deals.
Though FDI regulations in real estate have a three-year lock-in period for the investor, this can be side-stepped when the deal is done overseas. The lock-in here means that if $10 million comes in, the money cannot leave India before three years; but it does not prevent the foreign investor from selling the shares or convertibles to another foreign investor (the hedge fund). The former holds the securities in several special purpose vehicles floated in Mauritius, and uses these vehicles to deal with hedge funds.
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