Warburg Pincus backs India’s Future Capital

Narendra Ostawal, a principal with the private equity firm, and Vembu Vaidyanathan, managing director at the Indian non-banking financial company (NBFC) by chance struck up a conversation at 30,000 feet and within weeks they were finalizing the purchase of a 42.7% stake for INR4.7 billion ($85 million).

Warburg acquired the interest in Future Capital from Pantaloon Retail, a subsidiary of the Future Group, plus INR500 million in compulsorily convertible preference shares, with a view to building an ownership position of 70%. Last week it took a significant step towards this goal, buying an additional 25.6% for INR2.7 billion.

The final 1.6% is expected to come next month, completing what Future Capital claims will be India's largest-ever management buyout.

Vaidyanathan, formerly CEO of ICICI Prudential Life Insurance, will stay in his post as managing director after the transaction closes. He only joined Future Capital in mid-2010 after another chance encounter on an airplane - this time with Kishore Biyani, founder of Future Group and Pantaloon Retail - and owns 10% of the company. He has sought to increase the company's loan book while shifting business away from large-ticket wholesale loans towards short-term consumer loans and financing for small- and medium-sized enterprises (SMEs).

In 2010, Future Capital had a non-performing loan ration of more than 5%, while its $200 million loan book was 81% wholesale credit and 18% retail. By the first half of the current financial year, the loan book was worth more than $1 billion, the NPL ratio was down to 0.15%, while the wholesale share of business had fallen by half and the retail portion had risen to 58%.

"In retail, the cash-flow is more predictable, more diversified," says Vaidyanathan. "There are around 12 million SMEs in India that require financing so there are still a lot of opportunities."

In short, Future Capital has become the kind of NBFC that is attractive to Warburg Pincus and other private equity investors: a niche financial services provider catering to the large and fast-growing segment of the economy occupied by SMEs that lack sufficient credit history or assets to secure a loan through a retail bank. The same entrepreneurs may also prefer a debt-based product to giving up equity to private equity investors.

"What Vembu has done is build a platform that serves that large segment of the Indian population that has suffered from real lack of these kinds of financial services" says Vishal Mahadevia, managing director with Warburg Pincus India. "What we found was an opportunity to back him and provide the capital and a stable shareholder base as the company grows over the next few years."

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• Topics
• Investments
• Buyouts
• South Asia
• Financials
• India
• NBFCs
• Financial Services
• Warburg Pincus Asia