Almost 50% of the private equity funds launched this decade have used subscription credit lines to fund deals, and debt added fuel to most of the private equity deals in 2018.
From a global perspective, the issue comes down to the basics, which is that private equity funds look for reliable debt partners – and since the financial crisis, banks are no longer the most viable option. And this problem of finding a reliable debt financier is magnified in emerging markets.
“The biggest challenge,” says Prianka Mahanty, who heads Kylla’s business development operations for the UK and emerging markets, “is to align the interests of the equity investor with those of the debt financiers within the same platform. We need to think in terms of growth versus income and analyse risk return profile before onboarding debt into an equity platform.”
Kylla has experience in private equity deals in both Europe and emerging markets and sees that obtaining private debt financing is much easier in the former than the latter. “It’s a mammoth task in emerging markets,” says Prianka. She gives Thailand as an example of the problem. The country has a debt mountain of $372 billion – the equivalent of 77.6 percent of gross domestic product – and Thai households, among the biggest borrowers in Asia, are finding it increasingly difficult to maintain their payments.
The knock-on effect of this is that most companies in emerging markets have seen their credit ratings take a hammering because of the difficulties Thai households are having repaying their debts.
Because of this, the country’s SMEs are now looking to larger markets like Singapore and China for debt finance options. “However, the success rates are fairly low,” notes Prianka. “In emerging markets, micro, small and medium enterprises (MSMEs) and promoters use different financial reporting standards than in Europe and the US. Emerging market companies are used to working with a simple operating model of loans and repayment. This makes it difficult for equity investors to step into most MSMEs because there is no concept of AGMs and keeping your stakeholders involved.”
In this situation, private debt can play a very significant role. Kylla’s corporate debt solution involves raising funds through bond notes, with the funds then lent to experienced developers and promoters. The projects can range from building residential real estate to expanding a factory’s capacity to diversifying into foreign markets. Part of the fund is further used to restructure bank loans at a discount that enables high-yield performance.
Prianka also argues that in the current climate, as well as through lending, Asian investors need to consider diversifying their risk by investing in forex hedge funds. “Trading in the forex market provides an interesting opportunity for a lot of small and professional Asian investors,” says Prianka, “because it is a structured product which can give good returns without you having to monitor it every day.”
Kylla’s own fund was established four years ago, since when the firm’s traders and proprietary algorithm have delivered a 50% return on average every year. “As well as a high return, the fund supports portfolio diversification, reduced investment requirements and the opportunity to invest money in the West,” Prianka notes.
About Kylla Corporate Transactions
Kylla is an alternative investment firm that matches growth-focused companies with a worldwide network of professional investors. We provide and invest capital for expansion, acquisitions, recapitalisation and management buyouts.
Currently operating out of 12 legal jurisdictions and 14 countries globally, we have helped raise more than USD 350 million in capital and have USD 3.2 billion aggregated assets under management.
Prianka Mahanty heads Kylla’s business development operations for the UK and emerging markets.