India's Gold finance biz digs gold for PE firms

Considering the attractive returns on gold investments, private equity (PE) investors find no problem lending money to the gold financing companies. Recently a financial daily from India had reported that Sequoia Capital, which acquired 11.5 per cent in Kerala-based Manappuram General Finance and Leasing, has earned almost five times its investments in less than four years. The company had taken the stake in 2007 and 2008 at Rs.145 a share and Rs.165 a share, respectively.

The company made the exit this April by selling its entire stake for Rs.740 per share, much more than it invested initially.

Another south-based gold trading and financing leader, the Muthoot George group has found private funders for its expansions; hence the group shelved its plans for public offering and planned to raise funds via four firms, including PE players and hedge funds.

The financial daily, Business Standard quoted Sanjiv Agarwal, Partner (transaction advisory services), Ernst and Young saying, 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.

Gold loan business in India has been largely fragmented similar to the jewellery business. Not many organized players are in the fray. But still considering the wide-spread acceptability of gold as an instrument that can be mortgaged, the local jewelers too offer loan against gold. The organized gold financing market in is pegged at Rs.22,000-27,000 crore with a compounded annual growth rate (CAGR) of 38% over a period of 2002-09.

Historically, in India, gold financing business has been considered to be similar to that of non banking finance companies (NBFCs). But the organized players in India are only a few. However, these organized players including public sector banks, private banks and NBFCs have registered 35-40% growth over past few years and the size of business from organized players is expected to reach to Rs.50,000-53,000 crore by the end of the current financial year.

PE investors find gold financing business most attractive as there is secured lending with near zero defaults or losses. The sector is poised to see some more players to get into the fray.

Yet another financer, Shriram City Finance has also laid out plans to expand its gold loan business in association with Mahindra Finance.

The paper quoted Harish H V, Partner, Grant Thornton as saying, 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.

The gold financing has emerged as a latest investment crush for PE funds but the challenge lies ahead is the large number of unorganized players who already run the parallel financing business. Considering this fact, the PE funders and organized gold financers can evolve novel method to tap the potential loan-seekers and make attractive business out of it.