Financial services see record investments in H1: EY-IVCA India

The financial services sector in India has garnered the highest share of PE/VC investments in the first six months of this year, with $4.2 billion invested across 74 deals, the highest ever half-yearly investments in the sector so far.

From 2015 to the end of June 2018, financial services has seen investments worth $16.6 billion across 311 deals, according to a report by EY India and IVCA, released on Monday.

According to the report, the PE/VC investments were made across varied business models ranging from pure play banks to specialized NBFCs, small finance banks, online credit platforms, insurance companies, and payment solution companies. With a significant section of the Indian population still unreached by financial services, there is a huge growth potential for the financial services industry as the Indian economy continues to grow at a healthy rate of more than 7%, the report noted.

“Given the vast unbanked population and low penetration of financial products, coupled with a diversity of investment options available across banks, NBFCs, microfinance institutions, insurance companies and payment companies; the financial services sector is expected to continue attracting PE/VC investments. This confidence of PE/VC investors in the Indian financial services story could in our view, be further bolstered by Berkshire Hathway’s first investment in India, in Paytm,” said Vivek Soni, Partner and National Leader for Private Equity Services, EY India, in the report.

When it comes to deal activity within key sub sectors of financial services, non-banking finance companies or NBFCs attracted 107 PE/VC investments during 2015-1H18. This sector has witnessed a sustained PE interest with 24 deals in 2015, 26 deals in 2016, 26 deals in 2017 and 31 deals in 1H of 2018. The MSME (micro, small and medium enterprises) finance and MFI (micro finance institutions) sub-sectors saw 26 transactions each during 2015-1H18, making them the most sought-after sub-sectors.

Experts say the funds raised will help financial firms innovate and boost India's initiatives for financial inclusion of the unbanked. 190 million adults in India are without a bank account, the world’s second largest unbanked population after China, according to World Bank estimates reported in April.

“In terms of high quality governance, consistent performance and growth, job creation and taxes, the companies backed by PE/ VC funds have shown better performance vis-à-vis other companies. Within the financial services sector, PE/VC backed companies help bring innovation and financial inclusion in the Indian economy,” said Padmanabh Sinha, Chairman IVCA and Managing Partner, Tata Opportunities Fund.

The insurance sector received a total of 29 PE/VC investments during 2015-1H18. The average ticket size for investments in insurance underwriting companies is high: $226 million for life insurance and $60 million for general and health insurance. PE funds, which demonstrated the most interest in this space were Temasek, KKR, Warburg Pincus, Softbank and PremjiInvest.

The payments sector witnessed 26 transactions in 2015-1H18. The total amount invested was $2.4 billion with an average deal size of $109 million (excluding undisclosed deals). However, the marquee deal of the sector was SoftBank’s $1.4 billion investment in PayTM was a definite outlier. Another large ticket size investment was the $325 million investment by Carlyle in SBI Cards and Payments Services. The sector saw a number of investments in 2015 but the bulk of the deals were seen in 2017, when post-demonetization, digital payment companies became household name.

The fintech sector witnessed approximately 96 deals in the period 2015-1H18, pointing to the high PE/VC interest in the space. There was a marked spike in the deal count post demonetization as the true potential of digital payments was brought to the forefront. Nearly 70% of the deals in the fintech space during the study period (68 deals) were announced post-demonetization i.e., post November 2016. The average deal size remains small at $7.8 million, given the nascent stage of these companies.