“Career Insights: Structured Finance” focused on Mezzanine financing by Mr. Ashwin Narang, CFA

Speaker: Ashwin Narang, CFA, Head of in-Country and Financial Sponsors Coverage, FirstRand Bank

Moderator: Shreenivas Kunte, CFA, CIPM, Director, CFA Society India

Contributed By: Parvez Abbas, CFA, Member, Public Awareness Committee, CFA Society India

Understanding Structured Finance

The capital structure of a company has a top layer which includes senior debt and a bottom layer which includes preference and equity capital. Between the top layer and the bottom layer is a mezzanine layer which has the features of both debt as well as equity. Structured finance focuses on the mezzanine layer in the capital structure. Different market players participate in providing the required financial support to corporations. Banks and financial institutions are the primary lenders of senior debt, lending for working capital and capital expenditure needs of the borrowers. NBFCs largely focus on asset finance including loan against property and pricing is higher than bank debt. Private equity focuses on the bottom layer and provides growth capital by taking equity stake in the companies. Returns generated are much higher than other forms of financing. Private equity funding results in equity dilution and voting rights. Structured finance focuses on special situations with returns lesser than private equity but higher than senior debt. Structured finance is a bridge to defer equity dilution by the promoters.

Fund Structure

An investment vehicle is created through the pooled funds from various Foreign Portfolio Investors, Alternative Investment Funds and other vehicles which are limited partners. The general partner, typically the promoter group, manages the fund. The investment vehicle invests in companies across various industries. Investment decision is made after a careful consideration of various aspects including industry analysis, business model, risk vs. return analysis and legal & regulatory risk. Primary instrument in structured finance is Non-Convertible Debenture (NCD) in combination with convertible instruments. They are usually secured by pledge of shares and agreed financial covenants. The advantage to investor is higher return compared to other debt instruments and the investment instrument is senior to and secured than equity. The advantage to borrower is access to capital without diluting equity and maximizing cash flow utilization for business growth.

Roles in Structured Finance

The investment vehicle has the following organization structure:

Fund Head (12-15+ years of experience): leads the fund strategy and takes the final investment call and provides recommendation on transactions to the committee. The fund head manages relationship with the promoters and the investee companies and oversees the post investment monitoring framework. Director/Principal (8-12 years): leads the deal-making on individual investments. The director’s primary responsibilities include drafting term sheets, due diligence and post investment monitoring. Associate Vice President (5-8 years): leads the execution support on the transaction. Under the guidance from the senior team, works on industry research, valuation thesis, financial models and cash-flow projections. Associates/Analysts (0-5 years): They provide research and investment support. They work on investment presentations, financial modelling, trading and transaction comparable multiples, industry research and ratio calculations.

Desired Qualifications

Finance background including MBA, CA and CFA program. A CFA charter is desirable given the financial analysis learning that comes along with it. Cash flow analysis, consolidation of accounts, trading and transaction comparables, DCF and IRR are some of the aspects that one has to cover while working on a structured finance transaction. The CFA curriculum covers various concepts which come handy in building a career in structured finance.

Recruitment and Remuneration

The structured finance funds do not recruit in large pools. It is important to learn the basics of lending, investing and finance in early part of one’s career and keep looking for opportunities. The indirect route is through corporate banking, lending background from NBFCs, investment banking focused on mid-market and financial due diligence experience in Big 4 firms. Entry level salaries are in line with investment banking sector. Experienced professionals’ salaries are in line with private equity. Bonuses are transaction based and linked to portfolio performance. However, in the early part of the career it is important to focus more on the profile and the organization rather than the salary. Continuous learning is the key and one should keep reading annual reports and enhancing industry knowledge. Relationship building and networking, often overlooked in early part of the career, are very important.

Industry Trends and Future Potential

Structured finance is estimated to have grown at ~7x in the past few years (~$1BN in 2014 to ~$7BN in 2018). There are around 20+ funds in this space. The size of the Indian mid-market is very large in terms of number of companies. Mezzanine financing is underpenetrated in the capital structure of Indian companies. The Insolvency & Bankruptcy Code and other regulations like GST, RERA have given more confidence to investors. Some private equity companies have initiated a structured finance strategy in parallel to the PE fund. Wealth management funds are motivating small allocations from the UHNIs into structured deals. The promoters’ unwillingness to dilute their stake and the investors’ asset allocation to these funds would provide the necessary impetus to the structured finance market in India.

Link to webinar recording: https://www.cfainstitute.org/en/research/multimedia/2019/career-insights-structured-finance