AVCJ Awards 2017: Exit of the Year - IPO: Au Small Finance Bank
India’s small finance bank reforms allowed Au Financiers to tackle an entirely new business opportunity, ultimately leading to a successful IPO for the company’s private equity backers
India’s non-banking finance companies (NBFCs) have proven a fertile market for private equity players in recent years, with both local and international GPs investing in the institutions to meet the growing demand for credit and financial services unmet by conventional banks.
Rajasthan-based Au Financiers, led by founder Sanjay Agarwal, had already attracted several rounds of funding by 2014. Its investors, including Warburg Pincus, the International Finance Corporation (IFC), ChrysCapital and Kedaara Capital, saw in the company a solid performer they could help mold into a market leader.
“Au has had very robust systems and processes from the beginning, whether it’s credit policies, underwriting processes, or collections processes,” says Ashish Agrawal, director at ChrysCapital, which bought a 10.5% stake in Au for $24 million in 2013. “Also, they have built an extensive distribution in tier-three and tier-four cities leading to fast growth and a strong return profile, given huge credit underpenetration in these locations.”
Au’s PE backers had invested with the intention of helping the company identify growth opportunities, expand its team and improve its internal operations. However, a new government initiative would upend those plans and lead Au to completely remake itself.
All change
That initiative was the small finance bank license, which the Reserve Bank of India (RBI) proposed as a means of attracting India’s massive unbanked population into the financial system. The license would allow institutions to provide basic banking services, like accepting deposits and issuing credit cards, to low-income citizens overlooked by traditional banks.
NBFCs and microfinance institutions (MFIs), which were smaller and nimbler than banks – and most active in areas where the larger institutions wouldn’t or couldn’t operate – were particularly suitable candidates. Au was naturally attracted, but meeting the requirements for final approval required would be challenging.
For the company’s PE backers, the idea represented a major shift from where they had thought the company was headed. Nevertheless, they recognized that it could open up a whole new line of business for the company, and agreed to help create a plan of action. "After careful evaluation of the SFB opportunity, we came to the conclusion that the conversion would lead to long term shareholder value creation. Hence we decided to apply for the banking license," says ChrysCapital's Agrawal.
Au joined several other Indian NBFCs and MFIs – including several other PE-backed institutions – in applying for the first round of licenses in 2015 and was one of 10 institutions to receive in-principle approval that year. Meeting the regulatory requirements dominated the company through 2016, and the outcome of the process played a key role in Au’s IPO earlier this year.
The first stage of converting to the new structure was to overhaul the company’s internal systems to comply with the RBI’s reporting standards. Au needed to improve its IT team and implement monthly management information sessions to improve its decision-making processes. In addition, the company had to meet the RBI’s working capital requirements.
Au’s investors provided assistance in these areas: ChrysCapital helped Au expand its IT team and develop procedures for meeting the reporting requirements, while Kedaara teamed up with Partners Group to acquire Au Housing, the company’s housing finance arm. Divesting Au Housing was an effective way to raise capital for the small finance bank and also allow it to focus on its core sectors of small and medium-sized enterprise (SME) lending and vehicle finance.
As Au made progress toward obtaining the license, its PE investors began to consider their next steps. The conversion to a small finance bank would give Au considerable public recognition that would be useful in launching an IPO.
Good timing
Though some of Au’s peers had also announced plans to go public, in this case the circumstances were somewhat different. The company didn’t need the offering to raise working capital – the sale of Au Housing had left it with more than enough. Instead, Au’s IPO would comprise only shares held by its existing investors, which would all make a partial exit.
“Once we agreed that an IPO was the way forward and the timing was right with the company converting to a bank, the next step was to support the company by offering some of our shares in the IPO itself,” says Agrawal. “It wasn’t one of those IPOs where any of the investors felt stretched and wanted to do the IPO for the sake of getting liquidity – it was just the natural evolution of the business.”
The IPO in June saw Au’s private equity investors sell 53 million shares at INR358 apiece, raising INR19.1 billion ($297 million). Warburg Pincus sold 14.8 million of its 60 million shares, IFC sold 7.6 million of 30 million, ChrysCapital exited 11.3 million of its 22.5 million and Kedaara divested 10.8 million of 22 million shares.
As of early December, the company’s market capitalization was INR195.8 billion, with the stock trading around INR685.80 per share. Revenue grew to INR13.9 billion for the year ended March 2017, up from INR10.2 billion the year before, while net profit rose from INR2.1 billion to INR8.2 billion.
For Au’s backers the IPO and transition to the small finance bank are a vindication of the faith they placed in Agarwal and his management team. “Au's team is excellent in terms of execution. Once they knew what the requirements were to convert to a bank and got that approval, they set off straightaway to achieve those requirements," says Agrawal. “We worked collaboratively with them on some of the aspects, but I would say it was really Sanjay's execution abilities that allowed it to get where it is today.”
Pictured (left to right): Eric Wang of Alvarez & Marsal, Sunish Sharma of Kedaara Capital, Guarav Ahuja of ChrysCapital, and Manish Kejriwal of Kedaara Capital
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