IndoStar Capital Finance Ltd said it is looking at acquiring smaller non-banking financial companies (NBFCs) following a large capital infusion by Canadian asset manager Brookfield.
IndoStar on 31 January told stock exchanges that Brookfield is investing ₹1,450 crore in the lender to acquire up to a 40% stake. The investment includes ₹1,225 crore of primary capital infusion into the lender.
“We think that we would be a natural consolidator. We believe that a lot of smaller, specialist NBFCs may not find it easy to raise capital, both in terms of borrowing as well as equity, and these would be attractive opportunities for us," Dhanpal Jhaveri, chairman of IndoStar and vice chairman at Everstone India. However, he said that the immediate focus will be on organic growth. An acquisitive strategy won’t be exceptional for the lender. Following the liquidity crunch that hit the NBFC sector post defaults at Infrastructure Financing and Leasing Services (IL&FS) group, IndoStar acquired the commercial vehicle lending business of IIFL group. The business had a loan book of ₹2,450 crore at the time of the acquisition in February 2019.
“We have integrated the business fully within our IndoStar family. We now have more than 220 branches, so our disbursement capacity has risen dramatically. To a certain extent, we were not able to leverage it fully because while we had the equity capital, the market was constrained in terms of how much leverage you could avail," Jhaveri said. He said Brookfield’s entry would provide access to more and cheaper credit. Jhaveri said the transaction with Brookfield underscores the lender’s strategy to bring in a strong partner to take advantage of the market opportunity created by the liquidity crunch.
“After the IL&FS crisis, we asked ourselves how we could use the market situation positively even as we positioned ourselves well for the next 3-5 years. We felt that bringing in a global, reputable partner with more capital in the business would be a good way to tap the opportunity. The Brookfield investment essentially allows us to take advantage of the market’s disequilibrium and to grow," said Jhaveri.
“Over the next 12 months, you will see the economy coming back; we are seeing the first few signs of that," he added.
The Brookfield investment marks the first instance of the Canadian investor betting on the Indian financial services sector. So far, Brookfield has largely focused on the infrastructure, energy and real estate sectors, having invested more than $5 billion in these sectors in 2019.
Everstone, which set up IndoStar in 2012 along with other co-investors, hasn’t sold any of its existing shares in the Brookfield transaction. The homegrown PE firm plans to continue as a co-sponsor along with the Canadian investor.
“We did exit a bit during the IPO, but we have been investing from our subsequent funds. So, my view is that the capital table may keep changing but Everstone will continue to be a promoter of this business. From that perspective, at this point in time, there is no exit for Everstone in the medium term," he said.
“Both of us truly believe there is a multiplier value creation opportunity in this business and that is why we are not selling. As we go forward, both Brookfield and Everstone will continue to evaluate whether we should bring in other capital providers. But, with this infusion, we don’t need further capital for at least three years," Jhaveri added.