India's housing finance sector has seen its biggest PE deal

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Today, let's turn our attention to a highly anticipated transaction: Warburg Pincus’ buyout of Shriram Housing Finance. Bain Capital, Advent International, and CVC Capital were also in the running for the controlling stake in this arm of Chennai-based NBFC (Non-Banking Financial Co.) Shriram Finance. Finally, Warburg emerged as the victor.

Parties involved

Zooming in on the this subsidiary of India’s 4th biggest Non-Banking Finance Company (NBFC).SHF is a significant player with loan disbursements concentrated in Gujarat, Tamil Nadu, and Maharashtra—these three regions alone account for a whopping 65% of SHF's entire loan portfolio. These regions are crucial economic hubs in India, contributing almost 37% to the country’s GDP. For Shriram Finance, housing finance accounts for nearly 4% of its revenues, a segment that has shown consistent growth and potential.

Before the deal, Shriram Finance held a dominant 85% stake in SHF, with the remaining 15% in the hands of Mauritius-based Valiant Partners L.P. There was a buzz last March about the parent company wanting to trim their stake by 15%, aligning with their long-term goals of transforming into a bank. This move would not only streamline their operations but also potentially offer more regulated and secure lending options to their customers.

Meanwhile, Warburg Pincus is a seasoned player in India with over 25 years of investments. Warburg’s track record in India speaks volumes, from successful ventures in financial services to large-scale investments in the healthcare sector. This acquisition aligns seamlessly with their extensive experience and commitment to the Indian market.

By the Numbers

Here’s where things get spicy! Over the past five years, SHF’s AUM has grown by an impressive 43% CAGR. In the previous FY alone, AUM surged by a staggering 71%. This is a testament to the robust demand in Indian Real Estate and SHF’s strategic market positioning. Given that 2023 was a record-breaking year for Indian real estate both in terms of investments as well as sales, it showcases their ability to capitalize on market opportunities and expand their footprint.

The deal itself is valued at 2.3 times the expected FY25 Book Value (BV), which, interestingly, is on the more affordable side compared to recent deals like TPG’s acquisition of Poonawalla Finance at 3.5 times BV. 

The total deal size? A cool $555 million, with Warburg Pincus ready to inject around $120 million immediately post-closure. This injection of liquidity is one of the major highlights of the deal, providing SHF with the much-needed liquidity to expand its operations & enhance its technology infrastructure.

Market Buzz

On May 14, 2024, the day the announcement was made, Shriram Finance’s share prices jumped by 5%. Clearly, the market liked it. India’s housing finance market is currently valued at around $323 billion, with the affordable sector making up about 10-11%. Despite a mortgage penetration rate of just 11% (and even lower at 5% in rural areas), the affordable housing finance sector is poised to grow at an impressive 12% CAGR over the next four years. 

This growth reflects a burgeoning interest in the sector, similar to the rise of Aadhar Housing Finance, backed by Blackstone, which also made headlines with its IPO on the same day.

The deal not only solidifies Warburg Pincus’ foothold in the Indian market but also signals to other international investors the lucrative opportunities in India’s housing finance sector.

Future outlook

Looking ahead, this deal is subject to regulatory approvals and is expected to be completed by February 2025, along with a rebranding. Consequently, details on how the deal will be financed remain unknown.

Warburg Pincus' acquisition of SHF is more than just a transaction; it's a strategic move in a rapidly evolving market. The combined expertise of both entities is expected to drive innovation, improve customer service, and expand market reach. As the RBI pushes for stricter regulations and greater transparency by pushing these housing finance co’s to get listed, companies like SHF will be at the forefront of setting new industry standards.

Stay tuned as we continue to monitor this development and if you liked it consider sharing it with others who might find it useful