Apollo Global Management, ICICI Venture plan NBFC to fund asset purchases

MUMBAI: Private equity funds Apollo Global Management and ICICI Venture are planning a joint venture non-banking finance company to lend for asset purchases, an easier option for the US firm to exploit the growing financial services sector, said four people familiar with the plans.
This will be the second venture between the two private equity power houses after a $750-million special situations fund that was launched a few months ago.

Apollo, founded by Leon Black, a former executive at Mike Milken's Drexel Burnham Lambert, will be following in the footsteps of US rivals Kohlberg Kravis Roberts & Co, DE Shaw and TPG in investing in finance firms where rules are not as rigid as for banks, at least for now.

"There is a growing demand for sophisticated financial products among Indian corporates," said one of the persons familiar with the plan. "Apollo is a master in financial engineering globally. They are roping in ICICI Venture as a strategic partner for the NBFC-led structured finance business initiative."

The NBFC structure has been the preferred route for those who wanted to exploit the growth in the Indian financial services sector since bank licences are controlled strictly by the RBI.

The last time bank licences were issued was more than a decade ago, barring YES Bank. But the central bank plans to tighten regulations for finance companies and has set up a committee under former RBI deputy governor Usha Thorat to suggest new rules.

"Restrictions on external commercial borrowings in certain sectors like real estate and the ease of structuring transactions using mezzanine structures through NBFCs makes it a relevant business model outside the banking system," said Rajeev Suneja, partner (financial services), Ernst & Young.

The planned joint venture will do structured finance deals, mezzanine financing and promoter funding, among others, said the four people.

Apollo and ICICI Venture declined to comment on the plans.

Mezzanine financing has both debt and equity components and is between secured senior debt at the top and equity at the bottom, designed to generate more than 15%. Structured finance is a common practice in the West, but in India it is just taking roots.

"Over the past one year we have seen an increase in demand for professionals who can originate and execute mezzanine and structured finance transactions," said Ajit Premkumar of EAL Consulting, which hires for the financial services industry. Several foreign banks such as Citi and Standard Chartered have NBFCs. Domestic institutions such as JM Financial and Edelweiss are also active in this space.

Even securities firms such as Goldman Sachs are taking the finance company route. Goldman, Britain's Ashmore Group and India's Everstone Capital teamed up to create Indostar Capital Finance in March. The NBFC-led structured finance market, which has been largely driven by multinational banks, is expected to heat up with private equity firms turning aggressive.

Apollo manages assets worth $70 billion and its latest India deal was the 2,250-crore investment in textiles-to-pipe maker Welspun Group. ICICI Venture is the top private fund house in the country with $2 billion in assets.

The JV between ICICI Venture and Apollo could even compete with ICICI Bank, the promoter of ICICI Venture, in lending to some customers. Real estate, the sector termed 'risky' by the RBI, could also be among the JV's clients.

"As the Indian market develops, there is a need for different types of capital. Banks typically offer senior secured loan. There exists a demand for structured finance and NBFCs will address that," said an investment banker.