Risky Bet Of An Indian Fund House

After Piramal Healthcare sold its India formulation business to Abbott in 2010 for $3.7 billion, the group toyed with several ideas to re-deploy the money. But chairman Ajay Piramal was clear about the new business he wanted to get into. Financial services.

In the last seven years, Piramal Capital —the group’s finance arm — has grown into one of the country’s largest integrated financial solutions providers. Offering both wholesale and retail funding opportunities across the entire capital stack ranging from early stage private equity, structured debt and senior secured debt, it has about Rs 45,000 crore worth of assets under management.

But now Piramal Capital is ready for an even larger play in the retail segment. Expecting a nod from the National Housing Board in the next couple of months, it is all set to disrupt the country’s Rs 1 trillion-crore home loan space that is largely dominated by established home finance biggies such as HDFC and SBI.

But the question is can it cope with the mass market challenges? Critics feel that making one’s presence felt in an already crowded market is difficult for a player, unless it is different and innovative. And to be different in a retail market, more than deep pockets, one needs great knowledge about the industry and customers.

“Piramal’s financial service business has grown into one of the top players in the country in a very short time, which I think, was mainly aided by its better on-ground intelligence and well-informed and quick decision-making process. But, housing finance is new for the Piramals, and I feel they should grow the team and bring appropriate technology and processes as it is going to be a much more wide spread with hundreds of thousands of individual clients,” says Abhishek Lodha, managing director of Lodha Developers, a leading real estate player in India.

Fast Track Growth

Piramal Fund Management (PFM), a key vertical under Piramal Capital, recently created a record of sanctioning investments over Rs 3,000 crore within three months of launching its lease rental discounting business. The fund — with at least $1 billion worth of assets under management (AUM) and partnerships with leading global funds such as CPPIB, APG and Ivanhoe Cambridge — claims that the platform has significantly diversified its portfolio by constantly evolving its product mix.

“Our journey has been one of constant evolution, reacting to feedback from existing clients as well as targeting newer market opportunities to build a sustainable, value-driven, financial services enterprise,” claims managing director Khushru Jijina.

The PFM — a recently integrated non-banking financial platform, created by consolidating realty debt company Piramal Finance and equity-focused finance entity Indiareit, within the finance arm of Piramal Enterprises — had raised external funds in the region of Rs 500-1,000 crore for specific opportunities, supported by the parent committing between 7.5 per cent to 10 per cent of each fund size as sponsor.

“By combining the debt and the equity businesses, PFM was able to provide perpetual capital to real estate developers operating across the entire capital stack,” says Jijina.

Additionally, the fund business also enabled the platform to bring to market certain unique strategies such as slum re-development (Mumbai Redevelopment Fund) or bulk buying of apartments (Apartment Fund). While the combined AUM of both entities was approximately Rs 1,900 crore, the PFM also set up a $500 million platform with Canadian Pension Plan Investment Board (CPPIB ) to provide residential debt to tier-1 developers.

Differentiated Strategy

According to Jijina, the reorganisation also laid the foundation for a uniquely differentiated strategy — one that prioritised the relationship with the developer over and above the product or transaction itself.

“Our team was reorganised as per geography, with a local office in each target market and a full pyramid of cross functional professionals comprising investment, asset management, risk, and legal,” he says. In addition, its ability to meticulously customise each transaction and make an investment decision within an accelerated time frame allowed the platform to scale rapidly, capturing both market share as well as tier-1 relationships from market incumbents, adds Jijina.

“Financial services will be a key growth driver for Piramal Enterprises,” says a recent report by brokerage Motilal Oswal. “The company’s management believes that there is significant potential in real estate financing, as banks are not allowed to lend money for numerous activities. In real estate space, Piramal Enterprises engages with developers from project inception to completion, thereby bringing value to developers,” adds the report.

According to the report, the group has already built a loan book of more than Rs 161 billion over the past five years. Plus, it has an asset management arm that manages third-party capital worth Rs 87.2 billion.

Non Real Estate Focus

Apart from real estate, the wholesale business of PFM also includes a vertical called the Structured Finance Group (SFG), which aims to provide customised funding solutions to companies across sectors. This vertical, which has an existing $750-million joint venture with Dutch pension fund APG, targets mezzanine investments towards operating infrastructure assets. It has currently deployed Rs 3,028 crore across sectors as diverse as renewable energy, roads, industrials and auto components, claims the company.

Jijina claims that the combined AUM of the wholesale business across real estate and non-real estate has seen an exponential growth, up from Rs 8,950 crore in January 2014 to Rs 33,800 crore in January 2017.

“The key behind the platform’s growth, coinciding with periods of stress in the general market, is our ability to assess perceived risk,” he adds. Out of a 150+ member team, over 90 are purely focused on monitoring transactions with strong in-house processes and controls to detect any early warning signals across the portfolio companies. As a result of this, the book today enjoys zero non-performing assets, a major concern among India’s traditional banking industry at present, says the managing director.

Additionally, the composition of the AUM has also seen a deliberate shift over the years as the platform continuously endeavours to adapt its suite of products to suit the needs of the market better.

On the real estate front, in early 2014, the team spotted an opportunity in last-mile construction finance, wherein for regulatory reasons an arbitrage existed when competing against banks for such business. Construction finance, which comprised less than 4 per cent of the business at the time of integration, today accounts for 56 per cent of the proprietary AUM. Similarly in 2015, the platform pivoted away from residential and has been targeting both structured debt in the commercial space as well as a uniquely customised Flexi-LRD offering. With the integration of SFG in 2016, the platform also increased its exposure to non-real estate sectors with a renewed focus and ability to lend across the risk curve from 12 per cent up to 18 per cent across both senior, as well as mezzanine debt in addition to corporate loans and acquisition finance.

Most recently, in 2017, the platform announced its intention to offer pure equity funding through a new joint venture with global institutional investor Ivanhoe Cambridge. Ivanhoe has committed $250 million to this scheme.

“Participation from such marquee investors time and again serves as a validation of PFM’s track record and a testament to the team’s ability to constantly raise the bar and spot newer opportunities,” says Jijina.

Presently, PFM is exploring an opportunity in the finance restructuring space, estimated to be a $1-billion market, with Bain Capital Credit. Together, they will invest in businesses that need restructuring and acquiring debts.

Home Loan Play

For Piramal, the business of retail lending was a natural progression. “Given the size, scale and market relevance of the wholesale lending business, it was a natural progression to the retail lending space,” says Jijina.

Now the company has not only planned the big retail housing finance but also piloted an expansion into small and medium enterprises lending with the formation of an Emerging Corporate Lending group.

“Piramal has identified a niche for itself. It targets both the salaried and the self-employed segments. The latter is not adequately serviced well by most banks and non-banking lenders at present,” says Nikhil Bhatia, MD (Capital Markets) and head, Western Region, CBRE.

Housing finance in India, though looks challenging and crowded, has potential to grow, says Lodha. “The size of the mortgage market is still very small. The areas like construction and housing that Piramal has identified to serve are going to grow bigger in the next 10 to 15 years as the economy is fast progressing from lower income to middle income. So there is still enough scope for large and efficient players to enter this space,” says Jijina.

“One key advantage that Piramal currently enjoys in this space is the vast knowledge about the user segment. Therefore, it can make versatile and innovative products according to the needs of customers. And this has been the case in its earlier portfolios too,” says Bhatia.

Apart from the industry acumen, the technology and better consumer analytics certainly play a key role in Piramal’s product innovation and fast-paced growth. The company, which contracted the French financial technology leader eFront to implement one of the globally best technology platforms to support both its real estate financing as well as SFG business, intends to further supplement the automation of work flow to manage investment deal life-cycles, dashboards for asset and risk monitoring, strong controls for finance and accounting and customer relations management for external investors.