Deal focus: True North to end 13-year journey with Fincare

True North has three live investments in India-based non-banking financial companies (NBFCs). One, Home First Finance, went public more than two years ago, and a second, Fedbank Financial Services, is preparing to follow suit. However, when it came to Fincare Small Finance Bank (Fincare SFB), a NBFC-turned-small bank lender, True North recently opted for a trade sale.

Fincare SFB has agreed to merge with AU Small Finance Bank, which already trades on the local exchange, creating an entity with a balance sheet of INR 1.1trn (USD 12bn). It will generate liquidity not only for True North, but also for TA Associates, LeapFrog Investments, Tata Opportunities Fund, and MO Alternatives.

“While our discussions with AU were ongoing, our IPO card came through from the capital markets regulator,” said Divya Segal, a partner at True North. “It was a viable option, but we put it on the back burner for several strategic reasons.”

First, while Fincare SFB has pushed into secured lending, more than half of its INR 105.4bn in gross advances are the traditional unsecured microfinance products that made the bank’s name. AU has a largely secured book, so microfinance will account for just 7.5% of pro forma combined gross advances. By diluting microfinance exposure, potential balance sheet volatility is reduced.

Second, the match seems complementary. AU is larger but it doesn’t dwarf Fincare SFB. They are strong in different geographies as well as in different product segments, with Fincare SFB adding its strength in the south to AU’s coverage of the north and west. Third, Sanjay Agarwal, AU’s promoter and CEO, retains a significant shareholding and it committed for the long term.

“At Fincare SFB, nearly all the shares are owned by financial investor, which brings its own dynamics and timelines,” said Segal. “Having a strong permanent shareholder provides a degree of stability.”

He declined to give specifics as to the returns those financial investors can expect. Existing Fincare SFB shareholders will receive a 9.9% interest in AU, currently worth about INR 44bn. This is in part conditional on a INR 7bn capital infusion by the promotors of Fincare SFB. The promoter entity owns 78.6% of the bank and the financial investors own a majority stake in the promoter entity.

True North alone has a direct interest of 4.6% in Fincare SFB and it owns 34.2% of the promoter entity. The private equity firm built the business in 2010 by acquiring two NBFCs, Future Financial Services and Disha Microfin, via its fourth fund. The NBFCs merged, forming Fincare Business Services. It had USD 25m in assets at the time, but these grew tenfold over the next seven years.

“Then the central bank introduced the small finance bank (SBF) licensing regime [in 2015]. The difference between normal banking licenses and small banking licenses is you are supposed to do more retail business, less wholesale business,” said Segal.

“There is a certain inherent political risk to microfinance because the loans are small, USD 100-USD 200, and they go to rural households. When you become a bank there is a far stronger regulatory framework that ensures the political risk is reduced. That’s what we wanted to benefit from.”

Fincare Business Services received the last of 10 small finance bank licenses issued. True North owned 74% of the company but a financial investor cannot own a bank, so a group featuring TA, Tata, LeapFrog, and several strategic investors acquired a position for INR 5bn in 2017 and subscribed to a INR 980m rights issue one year later.

The deal facilitated a partial exit for Fund IV, but True North made a new investment in the business from its fifth fund at the same time. Another partial exit came in 2021 when MO Alternatives invested USD 25m. Segal added that LeapFrog acquired additional shares through that transaction.

Becoming a bank meant introducing a deposit-taking function. Fincare Business Services raised capital from 15 institutions; Fincare SFB holds balances for 5.4m customers. It was also necessary to improve the governance framework and technology platform to meet regulatory requirements and continue product diversification by expanding the number of secured offerings.

According to Segal, the bank’s asset book has grown fivefold since 2017, while the secured products share has risen from 15%-20% to 40%. In addition to the INR 105.4bn in gross advances, the bank has deposits amounting to INR 94.5bn – 79% of them from retail customers – and a 1,292-branch network. Net profit for the most recent financial year came to INR 2.2bn.

True North will receive AU shares for its directly held position in Fincare SFB once the merger closes. Liquidating the promoter entity and awarding shareholders additional equity in AU will be a more protracted process. It has already been a 13-year hold for True North – the firm’s second-longest to date – but, as Segal noted, “this was truly building out a new financial services entity from scratch.”

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• Topics
• South Asia
• Trade sale
• Financials
• India
• Financial Services
• True North
• TA Associates
• LeapFrog Investments
• Tata Capital
• Motilal Oswal Private Equity
• M&A