PE funds bet big on crisis-hit NBFCs even as other investors balk

Private equity funds are picking through the rubble of India’s crisis-stricken shadow banking sector, even as other investors balk.

The funds have invested about $2 billion this year in the country’s non-bank financing sector, which is worth some $40 billion. While that’s not enough to staunch the 16-month long cash crunch following the collapse of IL&FS Group, it is 50 per cent higher than the average over the last four years and comes after a strong 2018, according to data from research firm Venture Intelligence.

Investing in India’s shadow banks involves some serious risks. Slowing economic growth could drag more financiers into default. Altico Capital India Ltd., whose shareholders include Fiera Capital and Varde Partners, missed debt payments in September. The head of KKR & Co.’s lending business in India resigned last month amid rising defaults in the sector.

There’s also concern liquidations could spread after major shadow lender Dewan Housing Finance Corp. was seized by authorities last week. Apollo Capital and Cerberus are eyeing a stake in Dewan Housing, the Economic Times reported, citing an unidentified person familiar with the development.

But signs suggest private equity interest remains strong. PE adviser Vidura Capital is working on fundraising for six non-bank lenders, while Spark Capital Advisors India Pvt. is helping five, representatives for the firms said.

Other types of investors have gotten cold feet.

Mutual funds, which have been an important source of funds, cut their exposure to shadow bank bonds to the lowest in five years in October, Securities and Exchange Board of India data show.

The share of money from insurers as part of NBFCs’ total funding has also declined to the lowest in at least two years, according to Reserve Bank of India data.

Shadow banking is not a sector where anything you pick is good, said Skanda Jayaraman, managing director for investment banking at Spark Capital Advisors India, which last month advised Aptus Value Housing Finance India Ltd. on an equity raise. Still, “it’s a great time for private equity players to look at NBFCs as the valuations can be attractive.”

NBFCs focused on financing micro-, small- and medium-sized firms have seen significant interest from private equity funds, according to Arpan Sheth, a partner at Bain & Co.

Here are some of the biggest private equity investments in the sector in 2019:


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