KKR India: Flexible capital helped make dairy deal

KKR India’s 5.2 billion rupee ($77 million; €69 million) investment in value-added dairy company Kwality would not have been possible through a normal private equity deal, director of capital markets Tashwinder Singh told Agri Investor.

“If we were just a private equity firm in India, we probably would not have been able to do this deal. The ability to invest up and down the capital structure makes us a differentiated investor in the Indian marketplace,” said Singh.

“The deals we look at are very India specific [and] … it doesn’t have to be a private equity investment. Here we have an investment in dairy, which is the same sector that we have invested in in China, but from a different pool of capital and different type of structure,” he said, referring to the private equity investments in China Modern Dairy in 2007 and Asia Dairy in 2014.

KKR India used 5.2 billion rupees ($77 million; €69 million) from its local pools of capital to invest in Kwality, including its non-banking financial company KKR India Financial Services. The structured finance deal will fuel aggressive expansion in the dairy’s milk procurement and processing facilities, and shift the business model further into direct retail.

“That flexibility with different pools of capital in India is what enabled deals like [Kwality] to happen,” said Singh. KKR India Financial Services, set up in 2009, is geared towards debt financing, and has been a driver for many of the local investment unit’s deals.

“The foundational idea behind [structured credit solutions] is to provide long-term non-dilutive capital. Through such a structure, capital can be provided at either or both the holding and operating company level,” said Singh, adding that the majority of such transactions have collateral provided to the investor,  thereby reducing investment risk.

KKR’s founder, Henry Kravis, has said leveraged buyouts are far more difficult to achieve in India. A structured deal, on the other hand, also ties the portfolio company to a series of obligations through monitoring and credit contracts, meaning achieving a successful exit is less challenging in a country where IPOs are similarly rare, said Singh.

“There are ways and means in which in a structured credit trade the company is contractually required to pay out the money to us,” said Singh. “A number of these deals are usually cash settled. So exits become less of a challenge in the structured credit space than they are in the private equity space.”

Singh said exits in India came primarily through strategics buying out a stake. “I don’t think we have really seen too many private equity companies exiting from their portfolio companies just through an IPO. In a number of our cases, you could have a situation where the promoter buys back the instrument.”

But Singh said KKR is not worried about how an exit plays out just yet. Instead, KKR will look out for other deals that can benefit from growing demand for certain foods in India, by looking at companies that have the capacity to scale up in a challenging environment that could be improving. Singh said he was watching the parliamentary debate on removing many of the inter-state taxes that can make central storage and national trade of agricultural produce prohibitively expensive.

He said India’s growing young population is driving demand for value-added milk through processed products and the quickly-expanding coffee shop industry.

Coffee Day Resorts, a privately held company with a majority stake in India’s largest food and beverage retailer and coffee shop owner has been in KKR India’s portfolio since 2010.

The ability to do structured deals could see KKR doing more investments in the food and agribusiness sector, but, as the six-year break between investing in Coffee Day Resorts and Kwality shows, those deals could be slow to emerge.

“Fundamentally if you look at the farm sector in India, one of the things India has always struggled with is the amount of wastage that happens between the producer and consumer. One of the ways for solving the food related problems is to make sure that wastage gets reduced and to do that we need to have a strong supply side supported by appropriate storage infrastructure like cold chains, and other related infrastructure, which needs to be continuously invested in,” said Singh.

“We are looking, but I don’t have anything specific to tell you as yet.”