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Five Star Business Finance raises $50 million from Sequoia Capital India, others

LiveMint logoLiveMint 09-08-2017 Yuvraj Malik

New Delhi: Sequoia Capital India and US-based Norwest Venture Partners have led a $50 million (Rs333 crore) equity investment in Chennai-based lending firm Five Star Business Finance, the non-banking financial company said on Wednesday.

The round accorded a post-money valuation of Rs1,300 crore to the firm.

Sequoia and Norwest both invested Rs135 crore each for a 10% stake (each), said K. Rangarajan, chief operating officer at Five Star Business Finance. A small part of their investment went into buying shares from the promoter group.

Existing investors Matrix Venture Partners and Morgan Stanley Private Equity Asia also participated in the round. Morgan Stanley, which invested Rs114 crore in July last year, pumped in Rs61 crore and saw its stake come down to 22-24% from 35% earlier, while follow-on investor Matrix invested Rs2 crore to maintain its 22-24% shareholding, Rangarajan said in a telephone interview.

Five Star Business Finance offers small-ticket business loans and home loans to retail customers. With a sizable presence in Tamil Nadu, the company has 110 branches across tier-II cities in Andhra Pradesh, Telangana and Karnataka.

“Sequoia Capital has been an active investor in financial services across multiple consumer lending categories including MFI, affordable housing and gold lending. We are delighted to partner with Five Star which has built a strong foundation and an excellent core team to address the large market opportunity in MSME lending” said G.V. Ravishankar, managing director of Sequoia India.

Ravishankar joins the board of directors at Five Star Business Finance along with Norwest managing director Niren Shah.

Five Star Business Finance said it will use the funds primarily towards expanding its loan book, which currently stands at Rs550 crore, and to enter new markets-- Maharashtra and Madhya Pradesh. The company is aiming at a loan book of Rs3,000 crore by 2020, and at least Rs1,000 crore by March 2018.

“Last year, we significantly scaled up in Andhra Pradesh, our focus now is to expand presence in Telengana and Karnataka, with intent to enter central India this year,” Rangarajan said.

The funds infusion, most of which is primary investment, increases the capital pool which directly translates into higher loan disbursement, and improved capacity to raise capital from the market, he added. Five Star Business Finance, which has tie-ups with State Bank of India, Bank of Baroda, IMFR Capital and a number of other banks and NBFCs, raises external capital from time to time and on-lends it to its customers.

Rangarajan said the firm supports small business owners and those looking to buy a house. The average ticket size in the business loans category is Rs3-4 lakh over an average tenure of five years, and Rs7 lakhs for home loans for up to seven years.

“Five Star plays a very niche role in today’s markets by serving the large multitudes of small enterprises which are typically not catered to by most formal financial services players. Over the years, we have developed an expertise in assessing their cash flows and in underwriting their credit, while keeping the asset quality intact,” D. Lakshmipathy, chairman and managing director of Five Star Business Finance, said in a statement.

The company was founded in 1984 by V.K. Ranganathan, who later relinquished control to family member D. Lakshmipathy. “A management change happened in 2012 that elevated Lakshmipathy as the managing director… The company has seen a turnaround since that time as our loan book has grown over 10 times from Rs50 crore in 2012,” Rangarajan said.

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