FMO, CDC invest in Indian debt provider

As the debt market in India becomes increasingly popular with GPs, the development finance institutions have backed Au Financiers directly in a $60m funding round.

Joining ChrysCapital and Warburg Pincus as investors, London-based CDC Group and Netherlands-based FMO have backed Au Financiers, an India-based non-bank finance company, according to a company statement.

FMO led the investment, injecting $40 million, while CDC invested $20 million. 

The investments are expected to expand the company’s commercial vehicle finance business and grow in new business areas such as lending to small and medium-sized enterprises. The facility will directly contribute to the creation of 2,000 jobs at Au Financiers as well as thousands more through its client base of SMEs, according to the statement. 

India’s financial sector consists of more than 400 banks and over 12,000 non-bank finance companies, according to CDC. While urban areas are generally well-serviced, rural and semi-rural areas, where 65 percent of the population lives, are often heavily underserved and non-bank finance companies play an important role in providing financial services in these areas.

Rural and semi-rural areas, where 65 percent of the population lives, are often heavily underserved and non-bank finance companies play an important role in providing financial services in these areas

Research from CDC

Private equity firms ChrysCapital and Warburg Pincus, as well as the International Finance Corporation, have previously backed Au Financiers. In February 2012, Warburg acquired a $50 million stake in the business, with ChrysCapital joining as an investor this February by taking a 10 percent stake for $22 million. 

These firms are indirectly tapping into the debt and credit space that is becoming increasingly popular in India due to the lack of financing available to SMEs. Kohlberg Kravis Roberts, ICICI Venture, Apollo Global Management and SSG Capital are just a few of the firms with funds targeting distressed debt or credit. 

Vishakha Mulye, chief executive of ICICI Venture, explained to Private Equity International earlier that many companies that borrowed large amounts of leverage while India’s growth rate was very strong, overestimated the earnings growth of their businesses, which had led to a widespread need for debt funding in the country. 

She added, “Many of these companies in the last decade borrowed foreign currency convertible bonds in the international market – the total value of FCCBs expected to fall due in the next 3 years is around $42 billion. Many of these were borrowed at the rate of INR 45, but today the rupee is at INR 55 to the US dollar.”

“Further, none of them expected the bonds not to get converted and so never treated it as debt, but as equity. Today, it is a problem for some of them because the bonds have not got converted and they have to meet these debt payments that they had not envisaged having to do when they borrowed it in terms of their cash flows.”