India: Now, Private Equity Firms Eye Diversified Microfinance Institutions
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India, November, 01 2012 - After a gap of two years, private equity (PE) investors are again stacking investments in the microfinance sector. This time, it is the diversity of the portfolio that is attracting PE investors rather than profits from the core business of lending.
Drifting away from microfinance institutions (MFIs) operating under the traditional group lending model, PE firms are now investing in MFIs with strong distribution networks to market a gamut of products and services — from insurance, pension plans, chit funds to smokeless cooking ovens and bicycles.
Consider Lok Capital, a venture capital firm founded by IDFC’s Rajiv Lall and PE veteran and former Actis India head Donald Peck. The firm has been considering investing in a chit fund company for quite some time. As current regulations do not allow it do so, it plans to invest in an MFI which would distribute chit funds. “We are studying the idea of partnering an MFI that can offer chit funds to clients. This would help us expand our portfolio,” said Venky Natarajan, managing director of Lok Advisory Services. “Now, microcredit has a new definition. We are looking at companies with diversified portfolios, catering to rural finance in areas like agriculture,” he added.
Balussery Benefit Chit Fund is also planning to tie up with a Chennai-based MFI for distributing its products. So far this year, PE firms have invested Rs 750 crore in MFIs, against Rs 250 crore last year.
Estimates suggest five to six deals worth Rs 200 crore are likely to materialise over the next few months, according to Abhijit Ray, co-founder and director, Unitus Capital. “Financial inclusion will always attract equity, no matter what. However, now that interest rates are capped, PE funds are looking at MFIs as a marketing channel in rural areas. Almost all prominent MFIs outside Andhra Pradesh are expecting some equity infusion in the near future,” Ray said.
“The ambiguity that was there for a long time in the MFI sector, after the Andhra crisis, is largely gone. We saw at least eight deals involving equity investment of about Rs 750 crore in MFIs, across stages. There are quite a few others in discussions and we will continue to see action on this front in the coming months. The key would be to watch how the debt scenario plays out,” said Shashi Shrivastava, senior vice-president, Grameen Capital.
This month, Chennai-based Equitas Holdings, a microfinance and micro-housing finance company, received equity capital of Rs 140 crore. IFC, Washington, the World Bank arm that gives equity and debt funds to private sector companies, invested Rs 90 crore in the company. Microventures and India Financial Inclusion Fund together invested an additional Rs 50 crore.
In another major deal, Intellecash Microfinance Network Company, a subsidiary of the Intellecap Group of companies, acquired majority stake in Arohan Financial Services, a Kolkata-based MFI. In September, Bangalore-based Ujjivan Financial Services raised Rs 45-crore equity capital from IFC, as part of its two-tiered fifth round of funding, according to a company statement. Investor FMO (Netherlands Development Finance Company) also invested an additional Rs 2.28 crore in the company, adding to its earlier investment of Rs 32.6 crore.
In July, SKS had raised Rs 230 crore through a qualified institutional placement, which was oversubscribed on the last day of the issue.
The MFI sector has been reeling since October 2010, when the Andhra Pradesh government had issued an ordinance that curbed fresh lending and recovery of loans in the state. The move resulted in bad loans of Rs 6,000 crore, and this might wipe out the net worth of several Andhra Pradesh-based MFIs. Since then, PE investors in major MFIs, mostly based in Andhra Pradesh, have been scouting for exits. The crisis resulted in diversion of PE investments to MFIs outside the state.