Private equity major Citi Venture Capital International (CVCI) is making its first fresh investment in India since 2008 in the country’s troubled microfinance sector. CVCI has led a Rs 65 crore third-round of funding of Bangalore-based microfinance institution Janalakshmi Financial Services. Janalakshmi, founded by former Citigroup banker Ramesh Ramanathan, focuses exclusively on extending micro loans in the urban areas.
CVCI has taken ‘a significant minority stake’ in this transaction, said a statement. Other existing investors also participated in this round of funding, with the company planning to raise additional funding as a part of this round. VCCircle had earlier reported that Janalakshmi could be looking to raise up to Rs 200 crore in funding.
The deal is one of the largest equity rounds and the first by a mainstream investor for an MFI, after the Andhra Pradesh crisis started last year.
Andhra Pradesh government came out with a law last year, restricting the activities of MFIs. This has led to a dramatic fall in the loan repayment rates to 10-20 per cent from the earlier 98 per cent in Andhra Pradesh, which accounted for largest number of MFI customers and a quarter of loan outstanding in India. This has also resulted in banks freezing their lending to the sector and a subsequent fall in valuations in the sector, which had peaked after the listing of SKS Microfinance.
Unitus Capital was lead financial advisor and arranger to Janalakshmi and its shareholders for the transaction. Morgan Stanley also acted as an advisor.
In March, 2010, Janalakshmi had raised $10 million in a round led by Treeline Asia Master Fund, one of the largest hedge funds in Asia. Its investors also include Narayan Ramachandran, former country head of Morgan Stanley India, Bellwether Microfinance Fund, Lok Capital and the Michael and Susan Dell Foundation.
Janalakshmi Financial Services is a for-profit NBFC urban MFI with the promoters’ stake held in the not-for-profit entity Janalakshmi Social Services. This is the only MFI in India structured to keep the social spirit intact, according to information on the company website.
Ramanathan also forayed into low-cost housing space with Janaadhar Constructions Pvt Ltd, floated by Janalakshmi Social Services to provide homes for the unorganised sector.
As on September 30, 2010, Janalakshmi Financial Services had a network of 46 branches, with outstanding loans of Rs 107.2 crore and had disbursements of Rs 107 crore for the first two quarters of FY11. While the company’s major markets are Karnataka and Tamil Nadu, it also operates in Haryana, Rajasthan and Delhi.
“It’s a validation of the business model which we have pursued relentlessly for several years and it has helped us weather the unprecedented crisis in our sector with minimal impact. The core pillars of our business model are a constant focus on customers and their needs, the pervasive use of cutting-edge technology, and a deep and disciplined management team,” said Ramanathan.
Deal-Making In MFIs To Pick Up
While development finance institutes like IFC and social funds have been investing in the sector, only MFIs operating out of Andhra Pradesh are the ones who have been able to raise funding. Bandhan Financial Services, which primarily operates in West Bengal, has raised $35 million in equity funding from IFC. Others like BlueOrchard Private Equity Fund, Dia Vikas Capital and Incofin have been active in the sector.
But the deal-making is now expected to pick up in the sector. “I do expect that the deal-making will pick up in the sector, following the slow period we have had post-AP crisis and with the RBI coming out with guidelines which favour MFIs,” said Eric Savage, co-founder and president of Unitus Capital, adding that there might be more transactions in the coming months.
Several investors who stayed away from MFIs due to high valuations, which have since corrected now, can also look at the sector. “There will clearly be a discount in this environment by at least 30 per cent to 40 per cent, as compared to what could have been pre-crisis,” added Savage.
Since the AP ordinance came out in October, 2010, there have only been five deals worth $40 million in MFIs. While the calendar year 2010 saw 22 deals worth $140 million, the sector has seen only three deals worth $36 million in 2011.
Before the AP crisis struck, 2010 had witnessed the highest number of investments in MFIs in terms of deal volume – at 20 deals worth more than $135 million, according to VCCedge, the financial research platform of VCCircle. While 2008 saw the highest deal value in the sector, it was primarily due to SKS Microfinance raising $112 million across two rounds of funding.