InCred founder on scaling up fee-based businesses, picking PIPE over private market

By Bruhadeeswaran R and Narinder Kapur 23 March, 2020
InCred founder on scaling up fee-based businesses, picking PIPE over private market
Bhupinder Singh

Mumbai-based InCred Group, founded in 2016 by former Deutsche Bank executive Bhupinder Singh, will ramp up its fee-based businesses alongside its lending operations as it aims to become a full-services financial player. Both the lending and fee businesses are likely to launch alternative investment funds for the mid-market segment. In one of the fee-based businesses – asset management – the initial focus will be on alternative investments including private investments in public equities (PIPE), Singh tells VCCircle in an interview. Singh also explains the rationale behind taking the PIPE route and talks about the strategy of the asset management business. Edited excerpts:

InCred Group has diversified into various verticals. Could you give a background on the current businesses?

InCred Finance is into the lending business that we started in 2016. This has two verticals -- lending to consumers and MSMEs (micro, small and medium enterprises). We made a foray into the institutional and wealth business with the launch of sister company InCred Capital. InCred Capital has four verticals -- all in fee businesses. These are wealth management, asset management, capital markets and advisory. InCred Capital doesn't have any lending business.

How is your lending business growing in this risky credit environment?

We are making good progress on the risk side as well as the technology front. Our liability side is also starting to open up after the IL&FS phase for the industry.

How is the wealth business shaping up under InCred Capital in terms of hiring and building capacity?

In wealth, InCred now has 50 relationship managers under the leadership of Nitin Rao, an industry stalwart with 30 plus years of experience building and managing HDFC Bank's private banking business. Nitin will be joined shortly by a global private banking veteran currently managing assets worth $100 billion plus at a large global firm. As executive chairman, he will spend a week in a month to mentor and support Nitin.

How are you differentiating wealth offerings from others in the market?

As a full-service operation, we will cover all client segments from UHNIs (ultra high net worth individuals) to HNIs to emerging HNIs with a distinct strategy for each segment. The geographic footprint will cover India as well as NRIs (non-resident Indians) in select global locations. InCred has made a strategic acquisition in this regard which is currently pending regulatory approval. InCred’s approach will be client-led with a focus on value-added advisory rather than product pushing. There will be a full suite of products -- both in-house as well as a third-party -- including a range of funds (portfolio management services or PMS, alternative investment funds) as well as structured product offerings. InCred will also provide services such as succession planning, tax planning, and custody to structured products.

Is there a market for new wealth players considering wealth business in the market has seen a few stake sales?

There's a real space for another large platform despite the presence of several entrenched and well-regarded names. The market is large and continues to grow at a rapid double-digit pace, particularly in Tier-II and Tier-III cities.

Who is leading the asset management business and how are you establishing it?

On InCred’s asset management front, globally renowned fund manager Punita Kumar Sinha (former Blackstone senior managing director and wife of former Union aviation minister Jayant Sinha) is set to join the unit as executive chairman. In this business, InCred will be developing a large number of strategies with the initial focus being on alternatives including private investment in public equity (PIPE), long/short equity, fintech debt, financial inclusion, etc. InCred will also have a flagship PMS long-only product. The wealth and asset management business will both be open-architecture and yet highly complementary. Our initial focus will be the alternative side including PIPE. We have been contemplating the quant side which is an evolving market as not too many high-quality quant fund managers are in the market. We will be launching a fintech debt fund that's an area where we have a lot of expertise in-house given our retail presence. There is a real opportunity considering the liquidity crisis to generate safe high-yielding assets, which would be an alternative to FDs (fixed deposits). We will also have a flagship PMS long-only product. So four or five different strategies -- all in the alternatives bucket under Punita. Both the wealth and asset management businesses will work closely together. We will be open-architecture on both sides as the wealth business will distribute third-party products and not just our own products. While we rely on our own wealth franchise to generate AUM (asset under management), we'll work with third-party distributors that focus on both client segments of HNIs and UNHIs.

How are you planning to go about your PIPE strategy? What size and sectors are you looking at?

The PIPE strategy will also be an AIF vehicle, which is getting launched in partnership with Florintree Advisors, led by Mathew Cyriac, former Blackstone fund manager. The PMS and quant fund would also be AIF. These are the various strategies that we will be launching under asset management. In the initial phase, the PIPE fund would be launched for the domestic investors to raise about a couple of hundred crores. The private equity-style approach is something I think people appreciate as opposed to just writing passive checks for mid-caps. Being actively involved when you can create value will go down well with investors. And equally, if not more importantly, the ability to provide exits. This I think is something investors will appreciate in listed markets in India in mid-caps. It’s been harder to get exits in privates. That’s why we've picked the PIPE strategy. It will be sector-agnostic. The size could vary from Rs 200 crore to Rs 2,000 crore in market capitalisation and cover small to mid-caps.

What is the fintech fund under InCred Capital?

The fintech fund under the asset management business will do venture debt such as lending to KrazyBee, EarlySalary, and any of the other well-capitalised fintech startups that require debt funding. Many of the fintech startups have their own NBFCs (non-banking financial companies) and the fintech fund would lend to those NBFCs. This lending is wrapped in an AIF-II fund format where we would take money from LPs (limited partners) and deploy to the fintech startup. The fund is yet to be launched. We have partnered with other lending firms such as Fullerton, InCred Finance, RBL Bank and DMI Finance where we outsource the origination part to the fintech

You have a partnership with social-impact venture capital firm Elevar Equity as well for some fintech play?

InCred Finance has a fintech subsidiary Better Credit within the lending business, in which Elevar has taken an equity stake. This is a lending fintech arm, which is no different from EarlySalary or KrazyBee.

Are you looking for any more acquisitions after the West Asian wealth management business of L&T Finance Holdings? Any more target areas for acquisitions?

On the asset management side, we continue to look for acquisitions opportunistically. Particularly, the funds that haven't scaled up but have good managers with them. This could be the only area where are looking for acquisitions opportunistically.

There was chatter about taking the acquisition route to begin your advisory business?

The third part of InCred Capital is capital markets -- InCred has started this business with wholesale debt markets by hiring a market-leading team. They have also launched a structured credit business in this division and are working with a number of global fund partners to look at Indian special situation transactions. On the advisory front, InCred is in the midst of acquisition discussions with some well-known names in the Indian market. Venky Vishwanathan, who ran Deutsche's Asia capital markets and investment banking business, will spearhead the capital markets and advisory units at InCred.

How do the four verticals fit in under InCred Capital?

The investment banking team will work closely with the wealth team both for origination as well as placement of deals. We are going to be working very closely with asset management on strategies where we see room for investment banking to originate deals. For example, the fintech fund, where the investment banking team will have relationships, can generate new business for the funds to invest in. The idea is to develop this fee-based entity on its own. In a few years, we hope to get to a scale where it can stand on its own feet and maybe even go to public markets.

What is the holding structure between InCred Capital and InCred Finance?

InCred Capital and InCred Finance both have common as well as separate investors. I am the largest shareholder in InCred Capital. The common investors in both the companies include Ranjan Pai (Manipal Group chief executive) and Paragon Partners (homegrown mid-market private equity firm).

Are you seeking to raise capital for InCred Finance?

No. We are very well-capitalised.

How is your lending business growing? What does the average loan size look like?

InCred Finance is retail lending with about half each from consumer and MSME books. Its average ticket size for the consumer is Rs 1 lakh and for MSMEs it is Rs 1 crore.

Why is the fintech fund launched under InCred Capital rather than InCred Finance?

InCred Finance is lending through its balance sheet but Better Credit is a non-balance-sheet play. This is a pure originator of loans. There are several fintech models in the market. There are pure aggregators that have originated the loans through cash burn and many such players are still burning cash with no path to profitability. Then there are aggregators that originate loans by offering bespoke products through better risk accessment and processes. These loans come with a first-loss guarantee which is based on their ability to differentiate on risk. The second one has a better credit model. But, Better Credit doesn't have a balance sheet but we will be originating the loans to other NBFCs like DMI, ICICI Bank and InCred Finance. In this case, Better Credit would be providing the first-loss guarantee to the NBFC that takes the loans. The big difference is that pure aggregators work on a 15% margin with no risk assessment but lending has a 3% margin which cannot create a mass media brand, manage variable costs and spend on technology. Therefore, what we are doing is creating more value like risk insights, FLG (first-loss guarantee) to balance sheet lending rather than just giving business to other NBFCs. So in this model, we would be able to charge about 7-8% margin and try to minimise the cost over time.

Have you started lending from Better Credit?

We started three months ago. We already have a brand and technology. We had about 100,000 logins last month alone. We might do about a 1,000 loans this month; we did 350 loans last month and 50 loans the month before. The demand for small-ticket loans in the range of Rs 15,000-20,000 is enormous. It is all about risk processes and seamless front-end interaction with consumers. We are using spare capacity to originate the loans. We are making agents out of people who have bandwidth and time. For example, the small mobile shop owners had a tough time given the mobile purchases have migrated from the physical world to the online world. These shops are still functional for 10 hours a day but gainfully employed only for three hours. So we give them an opportunity to become a loan agent for us because there is still a lot of footfall of customers but they don't shop. This is a way for them to supplement income.

Several AIFs are expected to launch from both the lending and fee businesses. What are the timelines you are looking at?

All the funds should go live in six months or so. For each fund, we probably will be taking 5-10% as sponsor commitment. We haven't set the hard target for the funds. We want to play in the mid-market space so we would probably be looking to raise a couple of Rs 100 crores initially from domestic investors. In the second phase, we would like to take the fund size to Rs 1,000 crore with global investors.

From a growth point of view, how has your retail side (InCred Finance) fared?

We’ll end the book at about 35%-40% growth for the last year (ended March 2019). We had sold our housing business to IDFC, so these numbers will be adjusted for that. So around 35% growth. We’re getting a lot of debt support in a tough market from across the board, in particular public sector banks. We’ve also been raising a lot of money in the MLD (market-linked debentures) format. The debentures are sold to high net-worth clients. This, for a company our size with a single ‘A’ rating, is actually unprecedented.

In terms of the asset classification of the Rs 2,000 crore plus book, what does the portfolio look like?

It’s roughly 50:50 consumer and MSME. In terms of main businesses, the consumer loan would be the biggest. That’s where our technology and risk analytics are top-notch. Education overall is a big focus, through both lending to K-12 (kindergarten to 12th grade) schools as well as to students. We like that space a lot, our risk is very good, and the process is good as well. It’s important to note that we’ve built this as a business. A lot of people just lend to five schools and say that's a business, and that doesn’t work. We are going very deep into this market.