The U.S. based leading private equity firm
Kohlberg Kravis Roberts & Co.
) has come up with its latest plans to invest in Indian firms and
banks in dire need of capital.
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Kohlberg Kravis has plans to acquire nonperforming assets from
these organizations as well. The proposed investment will be
supported by a special global fund of $2 billion formulated to
finance in a similar scenario.
However, why would a profit-seeking firm invest in distressed
organizations? Let us delve a little deeper.
The Indian companies and financial organizations have ample
potential for growth due to the availability of cheap labor and
resources. However, the country's GDP slipped from a high of
nearly 9% in 2010 to 4.4% in the quarter ended Jun 30, 2013.
Moreover, a high rate of interest set by the Reserve Bank of
India (RBI) to control rising inflation is another factor
hindering debt payoffs and fresh investments.
Consequently stressed assets as a percentage of total debts
reached a decade high of 10.2%. As a corrective measure, the RBI
wants banks to dispose the bad debts to improve their credit
Now, here lie the opportunities for a foreign private equity
firms like Kohlberg Kravis. Firstly, the loss making companies
entail a lower cost of purchase. Secondly, given Kohlberg Kravis'
strong fund raising ability and the low interest rates in the
U.S, it is easier for the company to finance the investments.
Moreover, the widening scope of investment in the Indian economy
is a driving factor for Kohlberg Kravis' expansion in the
country. Earlier, the conservative family structure of business
restrained any form of sell-offs and instead the companies relied
on local banks or raised funds from public when in need of
capital. However, with time, an adverse economic structure and
the rising cost of investment have relaxed age-old norms, thereby
making Indian firm more open to vending stakes and units.
Now, looking at the short-term trend, the Indian economic
scenario doesn't seem that gloomy. The South Asian country's GDP
improved from 4.4% in the quarter ended Jun 30 to 4.8% in the
quarter ended Sep 30, 2013. Price inflation has been stable for
sometime and the RBI trying to curb it further. Moreover,
narrowing current account deficits and fiscal deficits are
showing signs of improvement as well.
Therefore, Kohlberg Kravis' move to expand in the potent Indian
economy is expected to augur well for the company's financials in
the long run.
Kohlberg Kravis currently has a Zacks Rank #3 (Hold).
Some better-ranked investment managers include
Fortress Investment Group LLC
Waddell & Reed Financial, Inc.
). All of these carry a Zacks Rank #1 (Strong Buy).