Fund focus: Kotak exploits distressed assets edge

India’s distressed asset space is becoming increasingly crowded, but Kotak Mahindra Group sees room for one more. As the firm prepares to deploy its first special situations fund, which recently closed at $1 billion, it believes decades of expertise in the asset class will make it a leader in the field.

“I think Kotak differentiates itself by being a player not only in the distressed and special situations space, but also in financial services for the last 30 years,” says Eshwar Karra, CEO of the Kotak Special Situations Fund. “We understand credit, we understand what works in India, and in the worst case we know how to work within the legal framework to recover our dues.”

The largest share of capital for the vehicle was provided by Abu Dhabi Investment Authority (ADIA), which anchored the fund with a $500 million commitment. Another sovereign wealth fund and an Indian family office came into the final close, and Kotak rounded out the roster.

Like many targeting India’s non-performing asset (NPA) space, Kotak sees the National Company Law Tribunal set up under the country’s new bankruptcy code as a key source of investment opportunities. The fund is officially sector-agnostic, but steel, automobiles, and infrastructure  are seen as having particular promise. 

Along with bankruptcy restructuring, the fund will consider investments in stressed assets – targeting companies before they need major turnaround work. This was not originally part of the fund’s strategy, but Kotak decided to expand the focus as the fallout from last year’s liquidity squeeze among Indian non-banking finance companies (NBFCs) continued.

“In recent months we’ve seen a huge void from the structured credit opportunities that NBFCs used to cater to,” Karra says. “That dislocation is a great opportunity, where we can get higher yields and cater to segments which the banks cannot target.”

Karra has a long history investing in NPAs, having previously headed Phoenix, an asset reconstruction company (ARC) sponsored by Kotak. Phoenix was also at the center of a previous collaboration between Kotak and a foreign investor, when the Canada Pension Plan Investment Board provided $450 million to the ARC for investments in distressed assets.

Kotak decided to add a dedicated fund in order to expand its investment options – the new vehicle will be able to take equity stakes in companies, for example. The fund will also take advantage of recent moves by the Reserve Bank of India (RBI) to encourage investors to replace senior managers in distressed companies.

“Effecting a change in management might be difficult for an ARC given the limitations of the structure,” says Karra. “We’re seeing a lot of situations where we can put in our own management teams, with a structured debt solution that would involve a much lower haircut than if you were to do a one-time settlement with these banks.”   

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• Topics
• South Asia
• Credit/Special Situations
• Fundraising
• Restructuring
• GPs
• India
• Kotak Investment Advisors