BackBFSI to see huge PE capital flow over the next decade
The sector could draw as much as $100 billion in the next 10 years, shows a report
PremiumWith India aiming to become a $5-trillion economy by 2024, the financial services sector is expected to grow significantly and attract large sums of capital from private equity (PE) investors.
The financial services sector could draw as much as $100 billion in private equity capital over the next 10 years, compared to the $35 billion raised in the previous 10 years, said a report by financial services firm Ambit Capital.
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Lending businesses will continue to account for a majority of the investments, as was the case between 2011 and 2020, but fintech and insurance sectors are expected to draw significantly larger sums in the coming years than earlier, the report said.
Over the last few years, investments went into creating payments systems. The coming years will witness capital flow into building loan books and other financial products and services, which will look to monetize the payments networks.
“So far in fintech, most of the capital raised in the payments space has been used up in funding losses as they build scale and capacity. Most business-to-consumer payment companies realize that they will not be able to deliver profitability from the payments business and to monetize these networks they are now aiming to expand to lending and financial products distribution," said Ausang Shukla, managing director, Ambit Capital.
“This is a conversation happening actively and people are raising money more for lending and for getting into insurance and asset management, some of which may go into distribution and some into manufacturing the products," Shukla said.
Insurance will also attract large sums of private equity capital in the coming years, according to Ambit. Investments were reined in by a complex regulatory landscape, but if regulations are made more investor-friendly, this segment will see large investments, it said.
“Today, there is a challenge for insurance companies to raise growth capital. If they are not large enough to get listed, there are limited avenues to raise money. Banks are restricted by the Reserve Bank of India (RBI) and in many cases don’t have the money to put in insurance. Non-banking financial companies are also strained for capital and are also under pressure from the RBI. The foreign insurance companies have not been entering because of restrictions on ownership and control and we have seen exits of foreign insurance companies. Hence, private equity has emerged as the pool for raising significant capital for the insurance sector."
Insurance is a product that’s very suitable for private equity, Shukla said .
“Today, they are mainly doing plain vanilla products. As the market grows and as companies get into specialized products there will be an opportunity to create significant value-adds. Globally, the market has been ripe with specialist insurance companies for homeowners, rentals, pets, cyber security and motor liabilities, among others, with direct to customer models getting high valuations in private and public markets," he said.
Fintech and insurance have seen increasing capital flows over the last five years.
While these sectors comprised around 25% of total investments in the first half of the decade, they raked in nearly 40% of investment deployed in the latter half, the report said.
On the banking front, Ambit said the directional view to ease up investments for non-promoter shareholders and the potential for regulators to more favourably look at private equity becoming promoters could drastically increase the availability of capital for the sector.
“The most recent internal working group report of RBI makes an interesting point. If it gets implemented, it will bring in a lot of capital. They are recommending to do away with the multiple ownership caps of 5% and 10% and saying that if you’re a non promoter, you can hold up to 15%. If you allow them 15% stake, if you allow them board seats, you will see a dramatic increase in private equity participation," said Shukla.
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