BPEA Credit closes $475 million fund, its largest to date

The alternative investor’s third India credit fund has closed with three times the amount of capital contributions as its next largest vehicle. Managing director and head of credit, Kachan Jain, spoke to FA about opportunity to provide credit in India’s substantial mid-market.
Delhi, India
Delhi, India

BPEA Credit, the credit arm of Baring Private Equity Asia (BPEA), has announced the final close of its third India-focussed private credit fund, which targets mid-market credit opportunities in the domestic market.

Closing fundraising at $475 million, the vehicle is the firm’s largest fund to date and is more than three times larger than its predecessor, which closed in 2019, at $140 million. The successful fundraise reflects the steady track record that BPEA has built over the years, managing director and BPEA head of credit, Kanchan Jain, told FinanceAsia.

While India’s banking sector is large and well established, Jain sees a “massive opportunity” to address underserved demand for customised capital in the market. The country grew by 8.9% last year and is forecast to expand by 6.8% in 2022, according to estimates by the IMF.

“We feel that there is a significant shortage of private capital in an economy as large and with as strong growth prospects as India, and we found that there is a huge mid-market,” she said.

BPEA Credit defines its mid-market strategy as targetting investment opportunity in businesses turning over between $50 million to $500 million in revenue. “But our sweet spot would be $100 to $300 million,” Jain said. 

She highlighted that the mid-market has recently experienced somewhat of a compression: “Large corporates have great access because of their size and deep relationships; priority sectors and SMEs get access as required by regulation; so you are left with a shortage of capital in the mid-market,” she explained.

The firm analysed 29 key sectors in India and found that a large majority – with the exception of areas such as utilities, telecom, power and mining – were dominated by mid-market players in terms of their contribution to sector output and earnings, Jain explained.

The opportunity seen by the firm, is vast.

Strong international backing

While most prospective transactions will be fully funded by the third vehicle, it is open to co-investment opportunity with its limited partners (LPs).

The third fund attracted a keen return of institutional backers from Asia and North America, as well as new cornerstone investors, Canada Pension Plan Investment Board (CPPIB) and International Finance Corporation (IFC).

Roughly 60% of the capital raised came from offshore institutions, with a large representation from pension funds in the US and Canada, and a number of limited partners (LPs) from the Middle East and Asia, Jain said.

In terms of returns, BPEA Credit – India III has a similar target to that achieved by BPEA Credit – India I: around 17% IRR, in US dollar terms. Its first fund, at a corpus of $90 million, is now fully realised, while BPEA Credit - India II is fully deployed and more than 50% realised, having made 14 investments and nine exits so far.

Jain confirmed that fund III is approximately 30% deployed and has achieved one exit. It reached its first close in December 2020 and final close this June. She added that the BPEA Credit team aims for full deployment by the end of 2023.

The returns achieved so far compare favourably with those generated by Indian private equity, Jain said.

“I think the returns we are achieving are attractive, because you’re investing in debt issued by what are essentially established businesses with strong growth prospects.”

Macro motivation

Jain was a member of domestic financial services group, Religare, when the company became part of BPEA Credit, following its acquisition, in 2016.

“When we set up the firm, I don't think many people were talking about performing credit or direct lending in India. The norm was more real estate or distressed and special situations debt.”

In particular, the latest fund is targetting sectors that its sees as having stable growth prospects. “Volatility is not something that we find attractive from a debt investment strategy,” Jain explained.

Sectors of focus are those that are driving industrial growth, such as automotive, pharma, business services, utility services, personal services, and fintech – and a number of the industrial manufacturing sectors that, according to Jain, are growing at 9-10% in real terms and 13-14% in nominal terms.

Since its inception in 2011, BPEA Credit has deployed close to $800 million across more than 50 deals in a number of sectors. Today, the firm comprises 24 people located across Delhi, Mumbai and Singapore.

The team’s operations have not been impacted by the merger between BPEA and Swedish private equity player, EQT, which was finalised last month. “We were not part of the merger proposition,” Jain confirmed.

According to the release shared with FA by email, the new fund is also looking to invest in businesses with strong ESG credentials.

On creating a successful ESG engagement strategy, Jain noted the importance of education and discussion, adding that the firm’s investees have generally been receptive to conversations on the topic.

“Everyone is willing to incorporate things are going to make their business stronger and better…. I think it is now accepted that your access to financing and to larger partners really improves if you are an ESG-conscious and compliant business, so we often use that in the discussion with borrowers.”

Continued focus on India

India’s recent reforms to strengthen banking and financial sectors, such as the Alternative Investment Fund regulations that were introduced 2012, or the Insolvency and Bankruptcy Code that was launched in 2016 have been “big game changers” to run a credit strategy in India, Jain said. India also continues to ramp up efforts to open up its capital markets for foreign investors and is hoping for inclusion in emerging market bond indexes, by early next year.

The list of foreign players active in the market continues to grow, and both alternative investors like KKR, Apollo and Bain, as well as asset owners such as CPIBB, have on-the-ground teams to ramp up direct investment execution.

“We think that any credit strategy in Asia over the next five to seven years will involve India as a dominant part,” Jain said.

For now, the BPEA Credit team will continue to focus on deploying the capital it has raised for its third India-focussed fund: “We see lots of opportunity in India… And we do have plans to add other geographies in Southeast Asia as we go along.

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