PE/VC firms invested over $2 bn in NBFCs, despite IL&FS crisis of 2018

The collapse last year of Infrastructure Leasing and Financial Services (IL&FS) pulled down India’s shadow banking companies but investors have not abandoned the sector, data shows. 

Private equity (PE) and venture capital (VC) firms have invested a little over $2 billion in  non-banking financial companies (NBFCs) — informally called shadow banks — in 2019, compared to a little over $1.4 billion a year ago, up 42 per cent. 

According to Venture Intelligence data, this year’s total come from 33 deals; there were 37 in 2018 (and $1.03 billion across 35 deals in 2017).

 Blackstone’s $385-million investment in Aadhar Housing Finance tops the list this year. Followed by CDPQ’s $250-million investment in ECL Finance and $230 million by New Investment Solutions in DMI Finance. 

The surge comes when several listed NBFCs have seen significant erosion in market value due to |asset-liability mismatches, tight liquidity and reduced ability to seek higher short-term borrowing.  

Rajat Tandon, president of the Indian Private Equity and Venture Capital Association, says investors believe the IL&FS crisis led to corrections in valuation and they see select NBFCs as good long-term bets. “Since RBI (Reserve Bank of India) is tightening regulations around the NBFC space, it will weed out a lot of bad apples. This is good for the sector in the long term.”

RBI had cancelled registrations of 1,851 NBFCs as of March and the number has dropped to the lowest in 10 years. 

“Fund raising will remain a challenge, as banks are still under pressure, with the sector not performing well,” adds Tandon.

According to Nomura, funding raised by NBFCs through banks and mutual funds rose only nine per cent year-to-date in 2019-20, compared to a peak growth of 30 per cent in 2017-18.  NBFC sector growth might fall to 4.8 per cent in FY20.  

One of the active investors in the sector is International Finance Corporation (IFC), the World Bank's investment arm. Jun Zhang, country head for India, said NBFCs lend to small businesses and for affordable housing and commercial vehicles — all critical parts of the economy. 

After the IL&FS crisis, banks were seen to be holding back on funding to NBFCs. Hence, he explained, IFC has been focusing on NBFCs. In October 2018, it decided to launch a billion-dollar masala bond (issued abroad but denominated in rupees) issue, of which the first lot of $100 million was immediately subscribed. 

This, to an extent, helped calm the markets. It showed many investors were willing to come here and take the risks, particularly on currency. IFC also stepped up its advisory services to NBFCs. 

“For our investments, we selected NBFCs with strong managements and good governance,” he said. 

Analysts expect more deals in the pipeline being announced in the coming months, as many funds believe this is an opportunity to acquire portfolios and assets at reasonable valuations. They are also bullish on the long-term scope and prospects of the NBFC sector.