Five Star is unicorn after $234 million round

CHENNAI: The year 2021 has got its fourth unicorn (valued at over $1 billion). Private lender Five Star Business Finance on Friday closed a $234-million funding round that values it as around $1.4 billion.
This round by the small business lender was a combination of primary funding from investors including KKR and TVS Capital, and a secondary sale by existing investor Morgan Stanley.
Having first invested in the 35-year-old NBFC in 2016, Morgan Stanley has made a full exit with its share (around 12%) being bought out by new investors KKR and TVS Capital. Existing investors Sequoia Capital and Norwest Venture Partners also invested in the round.
Currently, promoters hold around 20%, external investors 65% and friends and family circles have roughly 15% stake in the closely held entity.
Five Star plans to use the capital to expand its business to meet the funding needs of the small business community who were looking at unorganised money lenders.Taking control of the NBFC in 2002 from a relative, computer science engineer and first-generation entrepreneur D Lakshmipathy steered the company’s focus to SME lending from its core business of auto financing.

The company thus became a pioneer in the small business lending space when it was a rarity — a rarity back then — providing collateralised loans based on assessment of borrower’s business and household cash flows.
Bringing in a group of finance and banking professionals subsequently, Five Star said it has doubled its asset under management (AUM) for every year in the past four years till Covid hit. Even during the pandemic, the lender said it managed to achieve 100% collections in the month of September even with the moratorium.
Five Star lends for all needs of the small business community, fully backed by security, making it a profitable enterprise with a strong asset quality. As of December 2020, the company’s asset under management stood at around Rs 4,000 crore, and with a return on asset of around 6%, it is one of the best-performing players in the segment.
“As of December, our gross NPAs stood at around 1.3% and we hope to close the March quarter with an even better position,” Lakshmipathy said. “Our underwriting model has seen various business cycles in the past 15 years, making us uniquely positioned in ground level analysis of small business owners and providing them with funding alternatives,” he added.
“The strength of the founder and the management team, along with the credit processes are visible in how the company has navigated several small and large disruptions including demonetization, GST and now Covid-19 related challenges,” Sequoia India MD G V Ravishankar said.
Norwest India MD Niren Shah said Five Star has managed to reach 10x of the scale compared to when they first invested in 2017.
TVS Capital MD Gopal Srinivasan said, “Five Star has positioned itself as the best-in-class MSME lender in India’s missing middle with supreme operational efficiency, appreciating the on ground realities faced by self-employed own-account enterprises.” The NBFC has scaled to 262 branches across eight states in a completely offline model. It has around 4,000 employees.

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