Author: Tim Burroughs

Asian Venture Capital Journal | 25 Nov 2015

A sizeable portion of the PE capital entering Indian financial services has targeted wealth management as local players look to scale up their offerings on the back of growing private wealth

Avendus made its name as an investment bank - one of the top three in the market and a sought-after advisor on India consumer internet transactions. New majority owner KKR plans to use this business as the foundation stone for an integrated financial services platform.

Alongside the financial advisory business, Avendus has a private wealth management operation and an alternatives business. Both of these are primed for expansion, leveraging synergies with the investment bank, whether it is sourcing high net worth clients or dipping into the knowledge base of mid-cap companies for investment opportunities, and with each other.

Sanjay Nayar, KKR's India CEO, compares the model to the traditional merchant banks 'which were customer-centric and developed business models based on the trust they generated and the high-caliber advice they could offer.'

By focusing on the business owner segment, Avendus covers about two thirds of India's wealth, and 40% of its wealth management business comes through introductions from the corporate advisory team. Introductions are also made in the opposite direction. Another platform will be added with the creation of a non-banking finance company (NBFC).

'When you have business owners as clients it is not just about the fact they have wealth,' says Ranu Vohra, CEO and co-founder of Avendus, explaining how the NBFC and the wealth management arm will co-exist. 'They have committed that wealth to products and companies and therre may be a mismatch between what they have and what they would want to put into a business. Having a non-bank that can offer a credit solution is very important.'

Two poles

KKR's Avendus play is one of a number in India's financial services space, almost all of which are predicated on a level of differentiation or service that distances them from the norm. According to AVCJ Research, PE firms have deployed around $4.3 billion in the sector this year, the most since 2007. They tend to gravitate towards one of two poles: NBFCs leveraging greater penetration in rural areas; and wealth management services tailored to high net worth individuals (HNWIs).

'A lot of the ROE [return on equity] in the middle often gets competed away' observes Pawan Singh, a managing director at Bain Capital, which invested $200 million in NBFC L&T Finance in September. 'If you look at NBFCs, where people have created differentiation and earned higher ROE, has changed over time as segments become more crowded. Some NBFCs are trying to grow financial inclusion on the margin, servicing customers who today don't have other formal options. Catering to HNWIs for wealth management services is a different business and plays on a different kind of tailwind.'

A unifying element is the erosion of market share among the public sector banks, which is being picked up by private banks, NBFCs and other specialty finance providers. Inefficiency and capital constraints are contributing factors, as well as a lack of nimbleness in termss of providing products that meet customer demand.

The latest installment of the Capgemini and RBC Wealth Management's Asia Pacific wealth report puts the number of HNWIs in India - defined as those with at least $1 million in investable assets, excluding primary residence - at 198,000 in 2014, up from 84,000 in 2008. They have total assets of $709 billion.

'A lot of wealth has been created but more importantly people are now going through formal channels,' says Bhavik Hathi, a senior director at Alvarez & Marsal (A&M). 'Almost 60% of the market was unorganized but as of 2015 this was down to 20%.'

On broad level, KKR's Nayar says growth in India's wealth management industry is conditional on savings rates going up, capital markets maturing, and the rupee becoming fully convertible. Vohra compares the current level of sophistication in the industry to that of investment banking 10 years ago. 'A lot of families have small family offices or a company CFO that helps out on family investments. As their wealth grows and as the time they have to focus on investments reduces, there will be large demand for advisory services,' he says.

Avendus' wealth management business recently surpassed $1 billion in assets under management and the company is looking to reel in larger rivals such as Kotak Wealth Management and IIFL Wealth Management. (The latter agreed to sell a minority interest to General Atlantic for $173 million in October.)

While several international players are also competing in this market others have stepped back. UBS has wound down its local operation, while Morgan Stanley and RBS both sold theirs. Local HNWIs' discomfort with the fees charged for services is often given as a reason.

Growth capital

The domestic incumbents require private equity capital and support as they look to expand and fill this perceived gap in the market. One area in which KKR intends to help Avendus is in the talent acquisition, retention and development that are part and parcel of scaling up most financial services businesses.

'They need to hire the right people and expand product offerings,' adds A&M's Hathi. 'Many wealth managers have been limited to recommending their group company's products, but they are becoming more mature in terms of giving exposure to a wider variety of products and tying up with global partners.'

While the NBFC space is reasonably diverse, the question for wealth management is whether there are enough viable investment targets to sustain the recent space of PE investments.

Sanjeev Krishnan, India PE leader at PwC, notes that not every financial services deal will get funded because there have been concerns in the past about the quality of promoters. Menon Raghubir, a partner with Shardul Amarchand Mangaldas & Co, concurs, saying he anticipates no more than a couple of deals a year at best.

'Most of the big boys aren't willing to sell,' Raghubir says. 'Some boutique shops might be interested and Avendus is a classic example of a business set up by a few entrepreneurs. But how many more are there with the same market reputation? Pretty much none.'

Anita Davis

Senior Manager - Public Affairs

KKR Asia Limited

56/F, Cheung Kong Center

2 Queen's Road Central

Hong Kong

T: +852 3602 7335
M: +852 9681 7335

F: +852 2219 3000

E: anita.davis@kkr.com W: www.kkr.com

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