India’s largest alternative asset manager bets on private loans

India’s largest domestic alternative investment manager is moving beyond real estate and distressed assets into private credit, hoping to head off a wave of investment from private equity and pension funds in the fast-growing economy.

Mumbai-based Kotak is the largest Indian player in the country’s nascent alternative wealth management industry. The reputation gained in real estate funds now sees the best opportunities in direct lending to companies.

“The nature of the opportunities now will be more M&A, growth-oriented financing,” said Srini Sriniwasan, managing director of Kotak Investment Advisors, the $8.8 billion asset management arm of Kotak Mahindra Bank.

Sriniwasan added that there is also significant potential in buying commercial real estate in India. While “the rest of the world doesn’t find office and retail attractive,” he said, “India is the exact opposite.”

Alternative investments encompass a wide range of assets, including private equity, private equity, infrastructure, real estate, venture capital, growth capital and natural resources.

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As demand for distressed assets increases in India, Sriniwasan said alternative asset managers may also find opportunities to finance acquisitions where Indian banks and insurers are not active.

Sriniwasan said Kotak’s second distressed fund, with investments from sovereign wealth funds GIC and ADIA in Singapore and Abu Dhabi, has secured $1.25 billion but is targeting a total of $1.6 billion. The company’s first distressed asset fund, launched in 2019, has achieved a 20 percent return since launch.

Kotak has also raised a $500 million fund to invest in data centers, hoping for a 25 percent return, but put plans to set up a start-up fund on hold due to market volatility and falling valuations of tech companies.

Bar chart of credit investment ($ billion) showing India's private credit investment rising

Within India’s alternative asset management sector, “private credit has seen the biggest jump,” said Rajat Tandon, president of the Venture and Alternative Capital Association of India.

“For investors, the valuation of shares has fallen, and for companies, the cost of borrowing from banks has become extremely high. A personal loan is a good middle of the road for both.

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“And in India specifically, conventional lenders are cautious after various bad credit shocks and non-bank financial institutions are still recovering from the liquidity crunch,” Tandon added. “So the private credit guys are taking that opportunity to close that gap.”

Sriniwasan’s comments come at a time when global groups are making inroads into India. The Canada Pension Plan Investment Board opened its office in Mumbai in 2015. Among its recent bets in India is a $205 million investment in industrial real estate and storage developer IndoSpace’s latest real estate fund.

Meanwhile, global investor Brookfield recently committed more than $1 billion to Indian renewable energy group Avaada to fund its green hydrogen and green ammonia ventures.

According to IVCA Ernst & Young, private credit investments will account for 12 percent of India’s total private equity and venture capital investments in 2022, up from 3 percent in 2021.

Kotak’s growth came after a string of foreign companies liquidated distressed asset funds in the country.

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“When we raised the first one [special situations] basis [in 2019] Apollo was actually packing its special-situation base,” Sriniwasan said. “Lone Star is down. And WL Ross had just packed up a few years before.”

Some companies were “too early in the game,” Sriniwasan said, adding that the benefits of India’s 2016 bankruptcy law took time to emerge.

The new legal framework allowed creditors to launch insolvency proceedings against defaulting companies and courts to overturn company boards, paving the way for distressed asset sales.

“To be successful in India, you have to be down to earth,” added Sriniwasan. “It’s not a market that they’re trying to operate through what I call suitcase bankers from Hong Kong and Singapore. It might be a nice lifestyle for them, but it’s not going to generate returns.”