Centrum Alternative Investment Managers Limited (CAIML), the asset management arm of Centrum Group, has come out with an Alternative Investment Fund (AIF) that is looking to tap the large demand for private debt from corporates, especially mid-sized firms. The AIF is called Centrum Credit Opportunities Fund (CCOF). The minimum investment commitment from each investor is Rs 1 crore, with an initial investment of Rs 20 lakh and rest is to be spread over the next 12 months. Let us take a closer look at this product.
Led by executive chairman Jaspal Bindra, Centrum is a diversified financial services group with presence over two decades. Bindra was earlier executive director and CEO of Standard Chartered Bank in Asia. Centrum Alternatives is an India focused, multi-asset alternative investment platform focused on private debt, public equity, venture capital and real estate.
Undoubtedly, the funding needs of Indian corporates especially large segment of mid-sized companies have resulted in the need for private capital. Commercial banks, NBFCs, and AMCs are not really lending a lot. So, borrowers are seeking alternative sources of financing. The Centrum Credit Opportunities Fund is positioned to capitalize on this opportunity. It aims to deploy capital in the form of debt, mezzanine or hybrid instruments in mid-market companies.
CCOF is a scheme of Centrum Credit Opportunities Trust, approved as Category II Alternative Investment Fund registered with SEBI.
The fund aims to do lending to Indian corporates via adequately collateralized and well-structured transactions. It targets an IRR (internal rate of return) of 15-16% (post expenses & pre-tax basis) per annum.
The fund will have a closed-ended structure. It is understood that there will be no pure-play real estate exposure. Post IL&FS event in September’18, as per the fund, there also has been a steady rise in credit spreads, with the spread of BBB rated debt instruments over AAA instruments expanding by 90 bps (from 279 bps to 369 bps) over three years resulting in significant room for alpha generation through credit structuring.
The first close is expected by 31st July, 2019 or any other date at the discretion of the investment manager. The final close is expected after 12 months from the first close or any other date at the discretion of the investment manager.
Risk and return
The CCOF plans to lend to companies in sectors including Industrials, Chemicals (including specialty chemicals), Healthcare and healthcare ancillaries, Auto Ancillaries: OEMs, auto parts and equipment, Hospitality, Education, Metals, Select infrastructure: Road, water, logistics and EPC, Consumption-led Businesses.
It wants to avoid lending to companies in sectors like Pharmaceuticals, Telecom, Technology, Mining, Defence, Media, and Trading. The fund also plans to avoid early-stage companies and firms involved in greenfield infrastructure.
Structured credit AIF versus traditional peers
A structured credit fund offers the highest potential for pre-tax yield of 15-16%, but that is a function of high risk, low liquidity, and lock-in.
A credit risk mutual fund cannot offer such a high pre-tax yield, although it allows you to exit at any point in time and no entry load (so far). Of course, credit risk funds are exposed to interest rate volatility.
Gilt mutual funds have recently given 1-year returns of 15-16% but do not consider it as a given. That kind of returns came from G-Sec yield movement that nobody saw coming.
In terms of taxation treatment, do note that the AIF has a tax pass-through status and income would be taxed in the hands of the investors. However, as per tax regulations 10% TDS on any income would be deducted by the fund.
The Centrum Credit Opportunities Fund aims to invest in a portfolio of 8-10 investments, with average maturity of 2 to 4 years (any repayment during the investment period i.e. 12 months from the final close will be reinvested). The fund can invest a maximum 25% of the investible corpus in single portfolio investment, as per Sebi norms.
The fund aims to leverage strong origination capabilities within the fund team coupled with leveraging Centrum’s proprietary relationships and deal flow. Centrum claims it has partnered reputed promoters and established businesses with a credible track record.
The transaction structure would be backed by cash flow coverage for repayments with adequate marketable and enforceable security collateral – security cover to include tangible assets, shareholdings amongst others
Rakshat Kapoor, Fund Manager & Chief Investment Officer, leads the investment team. Rakshat has over 18 years of experience in structured credit. Previously, he was with Nomura Securities where he worked in the private credit, debt capital markets and investment banking divisions. Prior to that, he was with Deutsche Bank’s structured credit investments and ICICI Bank’s structured finance team.
Other fund details
Fund Size – Rs 500 crore with green shoe option of Rs 250 crore; total Rs 750 crore.
Fund Structure – SEBI registered AIF (Category II)
Investment Manager – Centrum Alternative Investment Managers Limited
Drawdown Schedule – 5% on signing of contribution agreement, 15% on first close and the balance 80% over the next 12 to 15 months
Sponsor Commitment – 5% of the fund size. Centrum Capital Limited is the sponsor.
Investment Period – 12 months from final close
Fund Term – 4 (+ 1 + 1 ) years from final close
IRR (Post Expenses, Pre-tax) – 15-16%
Hurdle Rate – 10% pre-tax on an annualized basis
Class A1 – Below Rs 5 crore
Class A2 – Rs 5 crore and above but below Rs 10 crore
Class A3 – Over Rs 10 crore
Management Fee (p.a. % of drawn down capital )
Class A1 – 1.75% of drawn down capital commitment
Class A2 – 1.60%
Class A3 – 1.50%
Set-up Fee (one-time as a % of capital commitment)
Class A1 – 2.00% of capital commitment
Class A2 – 1.00%
Class A3 – 0.50%
Expenses – 0.25% of capital commitment or actuals, whichever is lower
Carried Interest – 15% above hurdle rate with no catch-up
Type of Investors – Any investor whether Indian, foreign or NRI
Legal Counsel – Khaitan & Co. and IC Universal Legal
Trustee – Beacon Trusteeship Limited
Valuation & Tax Advisors – KPMG. The valuation for portfolio investments will be done on annual basis.
Auditor – Deloitte
Fund Accounting & Administration – CAMS
RupeeIQ take – The Centrum Credit Opportunities Fund will invest in listed as well as unlisted companies. The investment instruments are not mandatory to be rated. The minimum investment of this product makes it suitable for high net-worth investors who have a good understanding of financial products and have 4-6 years of time to spare for returns. But beware that there are risks of credit default, and be mindful of that.
Disclaimer: The article is only for informational purposes. Investors are requested to consult their financial, tax and other advisors before taking any investment decision.