Private equity firms are increasingly showing interest in small and mid-sized non-banking financial companies (NBFCs) due to their robust loan growth and enhanced asset quality. The NBFC sector is expected to attract both strategic and private equity investors, with emerging and mid-size NBFCs becoming particularly appealing targets.
Perseus, an affiliate of TPG, acquired a controlling stake in Poonawalla Housing Finance for Rs 3,004 crore in July. This trend is exemplified by other investments made by players like TPG in companies such as Five Star Business Finance, Kraybee Services, and Fibe.India.
This heightened interest can be attributed to the efforts made by NBFCs to fortify their liquidity, capital, and provisioning buffers, thereby strengthening their balance sheets over the past year. Coupled with a resurgence in economic activity, the sector is now better positioned to leverage growth opportunities.
Attractive option
The Reserve Bank of India (RBI) has implemented restrictions on acquiring controlling stakes in banks, making non-bank lenders an attractive investment avenue for private equity firms. Regulatory limitations on long-term non-promoter shareholding in banks have encouraged investors to explore opportunities within the NBFC sector.
Beyond regulatory considerations, the sector’s organic growth and scalability across various segments have emerged as key drivers of investments. Some of the largest NBFCs in India command valuations that surpass several banks, enhancing their appeal to private equity investors. The efficient management of liquidity further bolsters the attractiveness of these non-bank lenders.
While private equity investors have traditionally favoured businesses engaged in secured lending, newer entrants in the unsecured space have also attracted significant investment. Private equity infusion often shifts the focus towards profitability, urging businesses to scale up operations and demonstrate high growth and profitability.
For private equity firms, this approach opens up possibilities for successful listing exits, requiring a clear demonstration of sustainable profitability. Investors with a medium to long-term outlook are targeting profitable companies with strong management teams and proven track records.
Against odds
Despite approximately 90 NBFCs surrendering their licenses in the first half of 2023, experts remain confident in the sector’s ability to continue attracting private equity investments. The anticipated robust demand for credit further supports this outlook.
While small and mid-sized NBFCs contribute significantly to India’s financial inclusion goals and appeal to strategic investors seeking positive social impact, the sector’s stability and integrity depend on appropriate oversight and regulation. Investors are likely to favour non-bank lenders that prioritize strengthening their business models and maintaining high asset quality.
