Gold adds shine to PE portfolio

The glitter of the yellow metal has resulted in gold financing companies attracting private equity (PE) money. But the low number of players in the segment may spoil things.

For instance, Sequoia Capital, which acquired 11.5 per cent in Kerala-based Manappuram General Finance and Leasing (in 2007 and 2008, at Rs 145 a share and Rs 165 a share, respectively), earned almost five times its investment in less than four years.

It exited this April after selling its entire stake for Rs 740 a share. India Equity Partners (IEP), a co-investor, stayed invested. But, according to sources, there was enough interest from PE players to buy IEP's stake as well. Then there's the Muthoot George group.

One of the largest pure-play gold financiers, the group has put its initial public offer (IPO) on hold and is in discussion with four firms, including PE players and hedge funds, to raise money before the IPO.

"We have heard there are two-three firms that are increasing focus on the gold finance business. For PE players, this sector is attractive, as it is similar to non-banking financial companies (NBFCs) and gives Tier-I capital finance growth with returns of 25-30 per cent," said Sanjiv Agarwal, partner (transaction advisory services), Ernst and Young.

In addition, Shriram City Finance plans to expand its gold loan business in association with Mahindra Finance.

There are only four firms that have focused operations in gold finance - three of the South-based Muthoot group and the Muthoot Pappachan group, along with Manappuram General Finance and Leasing.

Public sector banks, private banks and NBFCs are players in the organised segment, which has registered 35-40 per cent growth over the past few years and is expected to reach a size of Rs 50,000-53,000 crore (Rs 500-530 billion) by the end of the current financial year.

"Gold finance firms are similar to traditional NBFCs, but require a strong brand to be successful. Thus, the number of specialised gold finance players is limited. Within the NBFC sector, 20-25 firms have PE investments. But, in the gold finance space, there are just about three-four pure-play firms. This limits investment opportunities for PE players, who find the sector attractive due to its secured lending with almost zero losses. We are very bullish on the growth opportunity for the sector and Manappuram Finance," said Ashvin Chadha of India Equity Partners.

Gold financing is unique to the country. India is one of the largest gold markets, with an annual demand of 700 tonnes.

The organised gold loan market in India is estimated at Rs 22,000-27,000 crore (Rs with a compounded annual growth rate of 38 per cent during 2002-09, according to an IMACS report.

"I think the recent exit of Sequoia and the returns it managed have attracted the PE sector. While there are limited number of players, these firms are very aggressive and not bothered about the presence of banks in this segment," said Arun Natarajan, chief executive officer, Venture Intelligence, a research service focused on PE as well as mergers and acquisitions.

Chadha said when IEP invested in Manappuram Finance in 2007 along with Sequoia, the organised gold lending sector was relatively small. Since then, it has been growing at 60 per cent year-on-year.

"If you look at the gold finance sector, it is fragmented. In Karnataka alone, there are 8,500 registered money lenders who provide gold finance. The organised sector scores over traditional money lenders as it enjoys the trust of customers. Besides, organised firms charge lower interest rates, have well-trained and customer-friendly staff and proper security infrastructure at their branches," he said.

"PE players are bullish about the financial sector in India, with an overall interest in segments like wealth management. Within this, gold finance is unique to India. But, the segment has very few players. For one organised player, there will be 500 jewellers who provide loan against gold," said Harish H V, partner, Grant Thornton, a research firm.

The other aspect about the sector that attracts PE players is low delinquency rates. "The sector certainly has a lot of scope to grow. There is not much risk if a player manages the portfolio well. But, there are other issues in gold, like certification, quality, etc. Moreover, if a large number of players get into this, it might get commoditised," said Shubhasri Sriram, executive director, Shriram City Finance. The firm has less than 20 per cent of its portfolio in gold, but plans to launch a host of new initiatives in this segment.