Fund focus: BPEA Credit spins out, closes Fund III on $475m

EQT sold its Europe-centric credit unit to Bridgepoint in 2020, having reasoned that the business was sub-scale in the context of the firm’s global ambitions and offered little competitive advantage. M&A activity was already focused on active ownership strategies around private equity and real assets.

EQT's recently concluded EUR 6.8bn (USD 6.8bn) acquisition of Baring Private Equity Asia (BPEA) naturally prompted questions about the future of BPEA Credit.

Formed through the absorption of a team from Religare Enterprises in 2016, the business has become one of the largest private debt platforms in India. But acquiring it wasn’t consistent with the EQT BPEA regional expansion strategy, so BPEA Credit became a fully independent manager.

At the time, BPEA Credit was in the market with its third fund, which launched in 2019 and reached a first close in late 2020. The process had already been extended due to pandemic-related disruptions, and when the EQT-BPEA deal was announced, three-quarters of the capital was already locked in. New investors were not deterred from coming into the final close of USD 475m.

BPEA Credit raised INR 5bn (then USD 90m) for its debut fund in 2011 under Religare. All 21 deals are now fully realised, with a gross IRR of 17%. Fund II, which included onshore and offshore LPs, closed on USD 135m in 2017. Eight out of 16 investments have been realised and IRR is tracking at 17%.

The larger Fund III corpus reflects the track record, the maturity of the platform – BPEA Credit has a 28-strong team, and all its investment and fund management operations are run internally – and the size of the investment opportunity, according to Kanchan Jain, a managing director at the firm.

“When you look at everything that has driven the growth of direct lending and performing credit globally, it’s much the same in India. Banks are predominantly vanilla, wholesale lending institutions, and exiting the customised structured credit space," she said.

"There is a huge opportunity for private debt to provide that growth capital. In developed markets, the liquidity premium is around 100 basis points, but in India, it’s nearly 350-450 basis points. We aren’t taking a huge amount of risk, we are supporting sectors with a lot of underlying growth, and we are getting high teens returns from secured debt.”

BPEA Credit will retain its existing name. Moreover, Jean Eric Salata, CEO of BPEA and now head of the combined operation in Asia, retains an ownership stake in the GP and remains an LP in the fund.

Canada Pension Plan Investment Board (CPPIB) participated as an anchor LP in Fund III, with additional contributions coming from institutional investors across Asia and North America, including pension funds. The International Finance Corporation signed off on a USD 40m commitment earlier this year, noting in a disclosure that the target was USD 500m.

“They see opportunities in mid-market performing credit, but they recognise the need for an on-the-ground presence – having a large team to think about the underwriting and situations that are more nuanced than large, structured transactions,” Jain said, in reference to participation by larger LPs.

BPEA Credit’s strategy has always been focused on performing credit. The team has seen non-banking financial companies (NBFCs) rise to prominence as credit providers to small businesses, reach crisis point as banks withdrew financing following the collapse of IL&FS, and mount a gradual revival. Its belief in fund products – which don’t rely on bank financing – is undimmed.

Banks retreating from more complex corners of the credit space is just one factor. Jain also points to the maturation of India's financial markets, wide-ranging regulatory reforms that have brought greater transparency in the organised segment of the country’s economy, and multinationals pursuing supply chain diversification, which has boosted local manufacturing capacity. On top of that, corporate balance sheets have de-levered.

“There is capacity to take on growth capital,” Jain noted. “Average leverage for our transactions is now 2.5-3.5x EBITDA, which is way lower than in developed markets, and it is linked to businesses that have been around for 20-30 years. The question was always why pay an extra 200 basis points for private debt, but now companies recognise the importance of diversifying their funding sources.”

BPEA Credit is seeing more structural creativity in transactions. In most investments, returns are contractual and underpinned by cash flows. While this downside protection remains for secured debt, the firm is increasingly able to negotiate additional upside that is triggered if the target company achieves its growth milestones.

These developments could help push returns beyond the typical 15-16% range. However, Jain added that the resilience of performing credit strategies across has made investors less insistent on getting a premium when they allocate to India. An insistence on 15-20% or more, has been replaced by an acceptance of 14-15% if it is tied to a strong growth story.

The same applies across Asia and it has given impetus to BPEA Credit’s nascent Southeast Asia business. Four of the 28 staff are now based in Singapore, following a concerted recruitment effort in the past year.

“Fund III is India only, but hopefully Fund IV will be India and Southeast Asia. We are seeing healthy deal flow and we are working on certain transactions with LPs that see the opportunities how we see them,” Jain said. “We want to create a seed asset pool and build a track record ahead of a regional fundraise.”

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• Topics
• Fundraising
• GPs
• Credit/Special Situations
• South Asia
• Southeast Asia
• India
• Baring Private Equity Asia
• EQT Partners
• private debt
• Fundraising