Serial investor Kalpathi Suresh--the founder of SSI Ltd who sold 51% stake in the IT training firm to PVP Global for $140 million in 2007—is no stranger to scripting big-ticket exits.
This time, aided by a raging investor appetite for well-managed microfinance assets, he netted over 12x returns in just about two years by selling his stake in Chennai-based Equitas Micro Finance to Sequoia Capital.
Last Saturday, the Equitas board ratified the sale of 10% stake held by Kalpathi Investments, an investment arm of Kalpathi Suresh, to Sequoia in a secondary transaction valued at Rs 44 crore. Suresh had invested Rs 3.5 crore in Equitas during 2007-08, without any management rights or board seat. Sequoia appears to have agreed to a deal without significantly altering the contours of the original investment.
This will be Sequoia's third investment in India's microfinance industry in less than three years. In March 2007, it invested $11.5 million in the country's largest microfinance player, SKS Microfinance, opening up a new deal pipeline for the private equity funds who have poured in over $220 million into the sector since then. Sequoia also invested in Ujjivan, a Bangalore-based MFI in late 2008.
Mape Advisory Group arranged the sale for Kalpathi Investments. The RBI approval for the transaction came in December last week after Sequoia struck an initial agreement to purchase the stake in October 2009. Incidentally, Equitas has also hit the market for a fresh fund raise, and the latest secondary transaction could provide the valuation benchmark for the same.
"The deal was signed within three months of initiation and generated strong investor interest despite being a secondary share sale. The very successful exit by a minority investor continues to demonstrate investor interest in well-operated MFIs," says Akshay Dixit, Vice President, Mape Advisory Group. Kalpathi will retain a token number of shares, under 0.5% stake, in Equitas.
Equitas commenced operations in December 2007, and has since grown to 98 branches. The company has cumulatively disbursed Rs 600 crore until September 2009.
Equitas had over 575,000 borrowers and a portfolio outstanding (based on assets under management) of Rs 430 crore in the half year-ended September of the current fiscal. It reported PAT of Rs 10.4 crore on an income of Rs 51 crore during the same six-month period. The company had reported a profit after tax of Rs 2.2 crore on a total income of Rs 34.9 crore for fiscal ended March 2009.
MFIs continue to hit the market for fresh fund raising as they expand their asset books tapping into a huge market potential. A number of micro finance firms are turning to PEs for fresh equity to grow scale in the business. Several MFIs, initially registered as non-profit firms, have turned into for-profit finance firms for accessing wider funds, with private equity emerging as an attractive channel.
2010 could be significant for this space as SKS is expected to go in for an initial public offering (IPO), testing the interest levels of the capital market and opening up an exit route for PE investors.