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August 25, 2011

Interview with KKR 's Sanjay Nayyar on mezz funding

Extracts from the Economic Times interview
As firms like Everstone and Goldman Sachs, or Apollo and ICICI get more active, we will see the growth of a mezzanine market.

We in KKR are in no hurry and will focus on quality deals. There will be an increasing need for alternate capital and we see that even the government is relaxing norms to facilitate capital-raising. We have just had the new takeover code, relaxation of ECB norms and we might see some headway on the FDI side too. These are all positives to ensure long-term capital flow into the economy.

We are dealing with promoter/companies with who you need to identify the best terms as they have many options. At the higher end of credits you have lesser bargaining power. But we make sure we structure the deal in a way that the company pays a minimum coupon, with some kind of floor to total returns and sharing some upside, driven by EBIDTA and equity. We find this as meeting both parties' objectives. So we have invested in companies with whom we have equity and also there are companies who prefer to opt for debt capital.

It won't increase the demand of credit but it will institutionalise the process. We are looking to establish an alternate asset class. What's prevalent nowadays is promoter financing at two times share pledge. So what we want to do is institutionalise the mezzanine market in the country at holding company and operational company level. This is how it began in the US a few years ago, and it would be a fresh source of capital in addition to banks. A lot of mid-size companies will need this as banks cannot always lend to them because of unsecured lending limit or capital market limits. In the long run, we can also develop a secondary market space, but it is a long-term game plan. And the regulators should be happy as this funding goes into creating long-term assets rather than just capital market activity or real estate.
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at