But after a decade-long attempt to wring big returns from India, the Wall Street titan has become a cautionary tale for investors in one of the worldâs most tantalizing emerging markets.
Rocked by the shadow-banking crisis that began rippling through Indiaâs financial system 2 1/2 years ago, KKRâs local credit unit lost 15.16 billion rupees ($ 207 million) in the final nine months of 2019, wiping out nearly 40 per cent of its capital. While the unit posted a small profit last year as Indiaâs central bank pumped record amounts of cash into the Covid-battered economy, KKR is now in the process of merging the business with a competitor.
Itâs a steep fall from grace for a venture that extended about $ 800 million of loans at its peak and at one point seemed poised to deliver a windfall to KKR in the form of an initial public offering. By late 2019, just before the pandemic plunged India into its worst recession on record, KKR had determined that more than half the loans at the unit — called KKR India Financial Services Ltd. — were at risk of default.
With a growing number of international money managers now looking for opportunities to sift through the wreckage of Indiaâs debt markets, the story behind KKRâs troubled bet illustrates what can go wrong. Interviews with a dozen people familiar with the firmâs Indian operations, most of whom asked not to be identified discussing private information, point to missteps that include questionable underwriting assumptions and a decision to accelerate lending in the lead-up to the 2018 crisis.
âThey wrote large checks in rapid succession to balance sheets that didnât have the size or capability to repay,â said Amit Goenka, a managing director of Nisus Finance Services Co. and two-decade veteran of Indiaâs credit markets.
In a response to questions from Bloomberg, KKR said its India credit unit enjoys a strong liquidity position and will keep looking for ways to expand.
âWhen we saw what was happening in the market, we rallied around our business — locally and globally — and created a task force that has been proactive in managing the portfolio and performance of the business,â KKR said.
The India credit unit recorded a pretax profit of about $ 9.7 million in 2020, according to one person familiar with the matter.
While KKR was among the most high-profile casualties of the 2018 crisis, it was far from the worst hit. Four of Indiaâs largest non-bank financiers have defaulted on their debt, while Franklin Templeton shocked market participants in April by freezing withdrawals from six Indian debt funds and telling investors it would wind them down.
When viewed in the context of KKRâs global business — the firm oversees $ 234 billion worldwide, including about $ 75 billion in credit investments — the losses suffered by the India unit are modest. Theyâve also had little discernible impact on KKRâs stock price, which gained 39 per cent last year and hit a record high this month.
Still, India credit was supposed to be a bright spot.
KKR was one of the first big international investors to enter the market in 2009, committing $ 100 million to launch the business. Like the rest of KKRâs India operations, the credit unit was overseen by Sanjay Nayar, a Citigroup Inc. veteran who had been handpicked by KKR co-founder Henry Kravis a year earlier.
Nayar saw big potential in structured corporate loans, which tend to offer higher interest rates than traditional bank loans but come with fewer creditor protections. He set up the unit as a non-bank finance company, rather than as an investment fund. Among other things, that enabled KKR to amplify its lending power by taking on leverage.
Early additions to the portfolio included Max Group, a conglomerate founded by health care and insurance tycoon Analjit Singh, and Avantha Group, the paper-pulp to power-plant empire led by Gautam Thapar. Rupee-denominated loans to the companies yielded about 12 per cent, and they performed well as India emerged from the global financial crisis relatively unscathed, two people with direct knowledge of the loans said.
Coffee Day Resorts was another high-profile bet. KKR took a stake in the chain, founded by Indiaâs âcoffee kingâ V.G. Siddhartha, through its private-equity business in 2010 and extended loans via the credit unit in 2012. KKR usually avoided lending to companies in its private-equity portfolio to prevent an over-concentration of risk, but Nayar persuaded his bosses in New York to make an exception, according to one person involved in the deal.
By 2013, KKRâs India credit team was riding high. The Teacher Retirement System of Texas, one of Americaâs largest institutional investors, had agreed to take a $ 100 million stake in the unit, while KKR had also raised about 4.25 billion rupees for a separate India-focused credit fund.
KKR began exploring the possibility of taking the India credit unit public in 2015, four people familiar with the discussions said. The feedback from IPO bankers was that KKRâs loan portfolio was still too small to attract strong investor demand, so Nayar and his team decided to ramp up lending.
As they doled out credit at a quickening pace, some underwriting decisions were questioned by members of KKRâs global credit group who had been co-investing with the India unit, two people familiar with the matter said.
One of the bets that raised red flags was Resonance Eduventures Ltd., a training school for Indiaâs top engineering college. KKRâs credit funds typically demanded collateral from borrowers in the form of physical assets, but the loans to Resonance were backed only by founder R.K. Vermaâs shares in the unlisted company. That left KKR lower in the creditor pecking order if Resonance had trouble repaying its debt. KKRâs bargaining power in the event of default was also limited because Verma was seen as integral to the companyâs value. The loans went ahead despite the global teamâs concerns.
Enthused by the India credit unitâs fast growth, Abu Dhabi Investment Authority, one of the emirateâs sovereign wealth funds, bought a stake in the firm for about $ 100 million in 2017. With local debt markets booming, the time for an IPO seemed ripe.
Everything changed in August 2018. A surprise default by Infrastructure Leasing & Financial Services Ltd., one of Indiaâs largest non-bank financiers, exposed the shaky economic underpinnings of a credit expansion that had propelled the nationâs shadow banking assets to a record $ 393 billion. Many Indian companies that had become reliant on short-term loans suddenly lost access to funding. KKR and peers that had extended credit to these borrowers were exposed.
Nayar initially saw the chaos as an opportunity, telling Bloomberg in an October 2018 interview that he was looking to buy portfolios from struggling shadow lenders. But by the end of that year, KKRâs global investment committee had taken a more active role in the business, rejecting Nayarâs requests to extend more credit and make acquisitions, two people familiar with the matter said.
Brian Dillard, a KKR managing director tasked in late 2018 with overseeing the firmâs credit operations across Asia, told colleagues he was worried the India unit would become a drag on the firmâs regional ambitions, two people said. Scott Nuttall, KKRâs co-chief operating officer, and Henry McVey, chief investment officer of KKRâs balance sheet, also expressed concerns about lax underwriting.
Investors in KKRâs separate India credit fund were becoming more circumspect too, in part because of the turbulence in Indian markets. In early 2019, after KKRâs initial fund had reached its maturity, they turned down the firmâs invitation to invest in a new one, two people familiar with the matter said.
Meanwhile, the credit unitâs loan book was deteriorating. Sintex-BAPL Ltd., an auto-parts manufacturer, stopped repayments in June 2019, a little more than a year after KKR made its original loan. Avantha Group was also falling behind on repayments, two people familiar with the matter said. Several other borrowers, including Resonance, were showing signs of stress.
KKR eventually wrote off the value of the Sintex and Resonance loans. The latter has been mentioned on internal KKR calls as a textbook case of how not to structure deals, two people familiar with the matter said. In late 2019, Indian regulators including the Ministry of Corporate Affairs said that an Avantha Group company — CG Power & Industrial Solutions Ltd., whose shares KKR held as collateral — had falsified accounts. CG Power said in October that the impact of the accounting irregularities could be assessed only after investigations by the company and regulators were complete. KKR has set aside provisions for the loan.
Sintex, Resonance and CG Power didnât respond to requests for comment.
Things had also gone badly wrong at another big KKR investment — Coffee Day. In July 2019, Siddhartha, the coffee chainâs founder, was found dead in a river in an apparent suicide. A letter purportedly written and signed by him and sent to Coffee Dayâs senior management mentioned âtremendous pressureâ from lenders and one of the companyâs private-equity investors that he didnât name. Coffee Dayâs board, which included Nayar, ordered a probe into allegations that Siddhartha had embezzled money.
The following month, senior KKR managers in New York took an even more hands-on role at the India credit unit, according to two people familiar with the matter. The firm formed a task force to look into each of the unitâs 33 outstanding loans, concluding by October that as many as 18 of them risked slipping into default.
Around the same time KKR India Financial Services had its long-term credit rating cut to AA, the third-highest investment grade, from AA+ by Crisil, the local unit of S&P Global Ratings. Borrowers of more than half of its 59 billion rupees in loans werenât fully complying with the original terms of their debt agreements, Crisil said.
B.V. Krishnan, the CEO of KKRâs India credit unit, left the same month. He was replaced by Kapil Singhal, a Goldman Sachs Group Inc. veteran who had been hired by KKR shortly before Krishnanâs departure.