Good returns lure Carlyle for more deals in BFSI sector

PE investors gain decent returns from long-term investments in banking stocks

Private equity majors have been riding high on India's consumption story and sectors like banking, financial services and insurance (BFSI) which are seen as proxy plays. After making a two-fold return on HDFC, it came as no surprise when global PE giant Carlyle increased its exposure to South Indian Bank (SIB) by participating in its fund-raising exercise.

Carlyle acquired 1.56 per cent stake in SIB for Rs 60 crore ($11 million) through its qualified institutional placement (QIP) earlier this week. With this, Carlyle has raised its total stake in the bank to 4.72 per cent and its total investment to about Rs 160 crore. The additional stake was acquired by Carlyle’s growth fund, First Carlyle Ventures.

SIB sold 15 per cent stake to raise Rs 443 crore, which also saw Renuka Ramnath-led Multiples Alternate Asset Management acquire a stake of about five per cent. In February, Carlyle India, through a partial exit from mortgage lender Housing Development Finance Corporation (HDFC), doubled its return on its 2007 investment in the company. In May 2007, Carlyle Asia Partners, Carlyle’s buyout fund, had invested about Rs 2,638 crore in HDFC, acquiring 15.25 million shares at Rs 1,730 a share. In August 2010, the shares were split 1:5. Carlyle, which held 5.22 per stake in HDFC, sold about 1.3 per cent stake and recorded a return of Rs 1,354 crore from the deal.

Shankar Narayanan, managing director, The Carlyle Group, said, “The Indian BFSI sector is attractive to long-term investors like us. Currently, the BFSI segment, a direct beneficiary of India’s growth, has low penetration, is a proxy play on the consumption demand in India and is a well-regulated sector.”

Sanjeev Krishan, executive director at PricewaterhouseCoopers, said, “PE firms would continue to be cautious investors in the Indian banking industry. While moderate valuations may be a reason, they would focus on the profitability track record and asset quality, including the quantum of restructured assets and non-performing asset levels of the banks before investing.”

Experts say the investment in SIB is a good bet for Carlyle, as the bank’s gross non-performing asset (NPA) ratio is the lowest among its peers. SIB’s net NPA ratio is 0.28 per cent, compared with an industry average of 1.5 per cent.

Currently, the bank’s revenue is Rs 65,000 crore.

“Another important factor is the impact on the banking sector by the slowdown in India’s gross domestic product growth, which may not have been completely factored into the performance of Indian banks yet,” Krishnan said.

INVESTMENTS BY CARLYLE IN BFSI
Year	Company	Investment ($mn)	% Stake
2012	South Indian Bank	10.81	2.00
2011	Edelweiss Financial Svs	23.72	5.47
2011	India Infoline	17.70	9.00
2010	Star Health & Allied Insurance	-	-
2007	Repco Home Finance	27.43	49.89
2007	HDFC	650.00	3.87
BFSI: Banking, financial services & insurance                            Source: VCCedge

Carlyle has also strengthened its presence in leading Indian financial institutions. Carlyle Mauritius Investment Advisors, a company arm, currently holds about 9.95 per cent stake in India Infoline and is the largest public shareholder in the company. Another subsidiary, First Carlyle Ventures, holds 5.6 per cent stake in Edelweiss Financial Services.

According to a recent Bain & Company survey on the Indian PE industry, after consumer products, the BFSI space, too, is likely to attract a lot of PE interest. “Market fluctuations give a right opportunity for long-term PE investors to strengthen their presence in BFSI portfolios,” said a partner at a Mumbai-based PE firm.

Like Carlyle, PE major Warburg Pincus had also made a hefty return through its exit from Kotak Mahindra Bank. In March this year, Warburg sold the residual 3.6 per cent stake in Kotak Mahindra Bank for Rs 1404 crore (Rs 530 per share). In February, it had sold another 2.4 per cent stake (Rs 490 per share) in the bank for Rs 857 crore. Warburg had acquired about 2.75 per cent stake in Kotak Mahindra Bank at the rate of Rs 230 per share in November 2004, by investing about Rs 80 crore.