The U.S. based leading private equity firm Kohlberg Kravis Roberts & Co. (KKR) has come up with its latest plans to invest in Indian firms and banks in dire need of capital.
Kohlberg Kravis has plans to acquire nonperforming assets from these organizations as well. The proposed investment will be supported by a special global fund of $2 billion formulated to finance in a similar scenario.
However, why would a profit-seeking firm invest in distressed organizations? Let us delve a little deeper.
The Indian companies and financial organizations have ample potential for growth due to the availability of cheap labor and resources. However, the country’s GDP slipped from a high of nearly 9% in 2010 to 4.4% in the quarter ended Jun 30, 2013. Moreover, a high rate of interest set by the Reserve Bank of India (RBI) to control rising inflation is another factor hindering debt payoffs and fresh investments.
Consequently stressed assets as a percentage of total debts reached a decade high of 10.2%. As a corrective measure, the RBI wants banks to dispose the bad debts to improve their credit quality.
Now, here lie the opportunities for a foreign private equity firms like Kohlberg Kravis. Firstly, the loss making companies entail a lower cost of purchase. Secondly, given Kohlberg Kravis’ strong fund raising ability and the low interest rates in the U.S, it is easier for the company to finance the investments.
Moreover, the widening scope of investment in the Indian economy is a driving factor for Kohlberg Kravis’ expansion in the country. Earlier, the conservative family structure of business restrained any form of sell-offs and instead the companies relied on local banks or raised funds from public when in need of capital. However, with time, an adverse economic structure and the rising cost of investment have relaxed age-old norms, thereby making Indian firm more open to vending stakes and units.
Now, looking at the short-term trend, the Indian economic scenario doesn’t seem that gloomy. The South Asian country’s GDP improved from 4.4% in the quarter ended Jun 30 to 4.8% in the quarter ended Sep 30, 2013. Price inflation has been stable for sometime and the RBI trying to curb it further. Moreover, narrowing current account deficits and fiscal deficits are showing signs of improvement as well.
Therefore, Kohlberg Kravis’ move to expand in the potent Indian economy is expected to augur well for the company’s financials in the long run.
Kohlberg Kravis currently has a Zacks Rank #3 (Hold).
Some better-ranked investment managers include Fortress Investment Group LLC (FIG), Lazard Ltd. (LAZ) and Waddell & Reed Financial, Inc. (WDR). All of these carry a Zacks Rank #1 (Strong Buy).
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