KKR, Sequoia lead $234m round for Indian NBFC

Norwest Venture Partners and TVS Capital also participated. KKR is investing via its Global Impact Fund, which closed at $1.3 billion in 2018. The deal comprises a combination of primary and secondary investment, with existing investor Morgan Stanley Private Equity Asia (MSPEA) selling an undisclosed number of shares.

It is not clear if MSPEA is making a full exit. Five Star specified, however, that its other existing investors, Matrix Partners and TPG Capital, would “continue to stay invested,” adding that MSPEA made an “excellent” financial return.

TPG provided $50 million in 2019 after participating in a $100 million round the prior year alongside MESPEA, Sequoia Capital India, and Norwest. MSPEA first backed Five Star in 2016, providing about $17 million. Total funding to date comes to more than $450 million.

For KKR, the investment represents confirmation of continued confidence in the local NBFC space, which has stumbled in recent years after period of rapid growth. KKR India Financial Services (KIFS), which was set up by the PE firm in 2009, is known to have struggled with bad loans. KIFS is expected to wind down its current book through a merger with InCred, another PE-backed NBFC.

The appeal of NBFCs in India is their ability to provide lending services to underbanked individuals, entrepreneurs, and small to medium-sized enterprises (SMEs) with more speed and flexibility than traditional banks. However, the model has historically focused on wholesale financing, including large corporate and real estate projects.

Investment climaxed in 2018-2019 but retrenched rapidly when a raft of bankruptcies revealed NBFCs’ debt funding models and wholesale strategies were unsustainable. This process was exacerbated by macro and systemic challenges, such as a local demonetization program, a tax regime overhaul, and COVID-19.

The result has been a strong shift toward retail-focused lending programs, especially in the service of SMEs. Five Star positions itself as a specialist in this space, estimating its target market includes 60 million micro, small, and medium-sized enterprises (MSMEs).

“The company is a true pioneer in the market having supported the growth MSMEs for decades, playing an important role in India’s economy,” Gaurav Trehan, a partner at KKR, said in a statement. “Five Star is a terrific example of the type of solutions-oriented business that KKR looks to support through its global impact strategy and in India.”

Five Star was founded in 1984 with a focus on MSME lending and housing loans in lower-tier cities. Operations encompassed 262 branches across eight states as of end-2020. This compares to 183 locations at the time of TPG’s investment in mid-2019. Norwest said the company has grown 10x since its first investment, which was in August 2017, according to AVCJ Research.

Assets under management stood at about INR40.3 billion ($556 million) as of year-end 2020.

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• Topics
• South Asia
• Financials
• Expansion
• Exits
• India
• Financial Services
• NBFCs
• KKR
• Sequoia Capital
• Morgan Stanley Private Equity Asia
• Norwest Venture Partners