Northern  Arc  raises $23 million, marks first close of debt fund

The first close attracted investments from various offshore investors, including PG Impact Investments, a global impact investment firm backed by Partners Group, Netherlands-based Anthos Fund and Asset Management, and US-based institutional impact investor Calvert Impact Capital.

“This investment is in line with our overarching strategy of partnering with high-calibre managers with compelling investment themes, demonstrated commitment to social impact and proven track records. Given its long-standing experience and demonstrated underwriting skills across multiple sectors, the Northern Arc team has built significant expertise in the financial inclusion space in India," said Sara Scaramella, member of the executive committee at PG Impact Investments.

The eighth fund of Northern Arc Investments looks to raise a total corpus of $100 million, including a greenshoe option of $50 million. The fund aims to make 15-20 investments, worth $3-5 million for each deal, over the next 12-18 months.

A greenshoe option, or over-allotment, allows companies to issue more shares in an IPO when there is greater demand from participants during the initial offering.

“Risk adjusted credit spreads in the financial services space are very attractive and we are aiming to invest well over ₹1,000 crore of long-term capital to financial institutions over the near term, especially those focusing on the under-served and under-penetrated segments in India," said Ravi Vukkadala, chief executive officer at Northern Arc Investments.

“Our quick run-up to the first close is a strong endorsement of our investment strategy and consistent track record, and we are privileged to be the partner of choice of our anchor investors for their India play," he said.

Northern Arc Investments, which manages Northern Arc Capital’s alternate investment fund vehicles, runs seven funds with cumulative assets under management of over ₹1,800 crore (about $260 million).

Northern Arc Capital, formerly IFMR Capital, is a debt capital platform for financial institutions serving excluded individuals and businesses.

Set up in 2008, Northern Arc connects non-banking financial companies working among financially-excluded households and businesses such as micro-financiers, affordable housing finance companies and small business financiers, with investors in existing and emerging debt capital markets.

Last December, Japan’s Sumitomo Mitsui Banking Corporation took a 5.4% stake in Northern Arc Capital for an undisclosed amount. In March 2019, the firm had announced that IIFL Special Opportunities Fund and Affirma Capital had committed to invest ₹910 crore in the company.

Northern Arc Capital has so far raised more than ₹1,400 crore (about $200 million) in equity. The company has enabled debt financing of more than ₹75,000 crore to over 200 financial institutions catering to unbanked and under-banked customers. It has also structured and executed over 500 capital market deals.

The relevance of alternative investment vehicles providing debt finance to the financial services sector has surged since the collapse of Infrastructure Leasing & Financial Services Ltd in September 2018.

While credit flow from non-banks declined 19.4% in FY19, flows from banking sources rose 44% during the period to meet the financing needs of the commercial sector, the Reserve Bank of India (RBI) said in its FY19 annual report. The decline in flows from non-banks, the report said, was mainly on account of lower flows from non-deposit-taking systemically important NBFCs (net of bank credit to NBFCs) and housing finance companies, particularly in the aftermath of the IL&FS event.

“Northern Arc is a recognized leader in the impact investing private credit space in India with a strong understanding of the market and we value the fund’s diversified approach to financial inclusion across multiple sectors," said Songbae Lee, director investments at Calvert Impact Capital.