Niva Bupa grew 4x in 4 years; may attempt IPO in 15 months, says True North's Divya Sehgal

Divya Sehgal, Partner, True North

Four years after picking up a majority stake from Max in Max Bupa Health Insurance (now Niva Bupa Health Insurance), homegrown private equity firm True North has struck its biggest deal yet, by ceding control to JV partner Bupa.

True North, which also backs NBFC FedFina and Fincare Small Finance Bank, has agreed to sell a 20 percent stake to Bupa for around Rs 2,700 crores, which will result in the British firm's stake going up to 63 percent.  There is also a second leg to the transaction which will involve a primary capital raise of Rs 800 crores from financial investors, following which Niva Bupa will command a valuation of around Rs 12, 600 crores.

Moneycontrol caught up with Divya Sehgal, Partner, True North, for an exclusive chat on the key transaction. The interview was first telecast on 29th September on the show 'Deal Central'.

Sehgal says Bupa ( which founded Niva Bupa back in 2008 with Max India) picked up a majority stake to provide shareholder certainty to the business which has grown 4x in the last 4 years. He believes a formal listing of the firm is likely to be attempted in 15 months based on market conditions and adds that post approval of the external primary capital raise, True North's stake will come down to 28 percent.

On 29 September, Moneycontrol broke the news that True North has held advanced discussions with a consortium of financial investors which includes Temasek, Motilal Oswal Private Equity, Paragon Partners and SBI Life for the proposed primary round, following which the consortium may end up holding around 7 percent stake in Niva Bupa.

(Edited Excerpts Of The Interview)

Congratulations on the deal Divya. It's not a complete exit and you still have some stake left in Niva Bupa.

Thank you very much, Ashwin, to you and to Moneycontrol. It's a journey of ours in the business and of the business. So, we continue to be a joint venture partner, albeit a minority one.

In February, 2019, you picked up a majority stake in the firm and four years later, you have decided to cede control to the joint venture partner. How has Niva Bupa evolved since you came on board? What were the key triggers for the deal and why now?

We bought control from the Max Group back in 2019, as you stated, post the regulator's approval. And the idea really was, if you look at the space – insurance, specifically health insurance, is in our view, a very attractive industry segment. This was a good platform. We loved our conversations with Bupa and we felt that we could have a truly outstanding partnership. And we can perhaps together build what we thought would be the most admired health insurance business in the country.

We were able to attract the current CEO Krishnan, who was earlier running another large health insurance business. He joined pretty much at the beginning of our investment, and he has led an outstanding transformation of the business over the past four years. So, the business has grown more than 4x in four years. It has had a growth rate of 40 percent plus. It has launched multiple products. It has very high customer NPS scores and very high employee satisfaction scores.

The business has done really well. And to that extent, as you know, this is a business that is based on solvency, so it needs capital. The business has consumed nearly all the capital we had planned over six years, in three and a half years. Hence, it was fair, given the growth of the business, that we found a way to raise new primary. And that was how this transaction really started, Ashwin.

You asked me, why are you selling control. The idea really was not to exit at this stage. But the transaction started eight months ago to raise some primary. We said let's raise 800-1000 crores, and Bupa will pick their share. As a fund, we have a limitation on the amount of money we can invest. That primary round got oversubscribed. And when that happened, Bupa said, "You know, if this is happening, why don't we consider becoming a majority shareholder. We can provide, say, a shareholder certainty, a shareholder permanence to the business." And that is how this transaction happened.

Four years back when you first entered Niva Bupa, back then, the entire company was valued at 1000 crore rupees. What is the overall valuation of the company based on the current deal and what kind of returns are we looking at?

So, see, to your point, Ashwin, obviously, we came in at a certain value, but we've invested a lot of money over the past four years. We and Bupa, both of us, have invested money in the business. Currently, the valuation is circa Rs 12,600 crores give or take, which includes the primary that is being raised from the financial investors at this point. So that's where we are. The business has done quite well, the valuations are accreted. We are generating healthy returns, well above standard private equity returns, Ashwin.

Tell us more about the final shareholding pattern post the regulatory nod for the transaction. So, Bupa goes up to 63 percent.  Does True North own the entire remaining 37 percent or are there other smaller minority shareholders as well?

As I briefly shared, this transaction actually started as raising primary into the business and that's what the fundamental nature of the transaction is. So, while we have signed and announced the transaction with Bupa, we are shortly looking to raise another 800 crores into the business as primary capital and that will be from financial investors.

And obviously, all of this is subject to the regulator's approval. So at the end of it, if we receive the regulator's approval, Bupa should be 63 percent, we should be 28 percent, 7 percent should be the financial investors, and the remaining is the management.

Divya, the health insurance space is not really a space, which has seen a lot of M&A activity in India over the past few years. One transaction that I can recall is Star Health Insurance when Westbridge and Rakesh Jhunjhunwala entered Star Health Insurance and then later, the firm got listed.  Are Bupa and True North planning an IPO for Niva Bupa as well and if yes, can you give us a timeline?

Health insurance is a part of the non-life industry. Health has become actually the largest segment over the past four years and has been growing at close to a growth rate of 18-20 percent over the past few years. To that extent, it's actually a very large and growing segment.

Now eventually, we are the most populous country, and clearly 'insurance for all' is a clear goal of the government and of the regulator. So, this is going to become, in our view, one of the largest segments. In fact, if you look globally, some of the highest market cap companies in insurance are actually pure standalone health insurance players.

We genuinely believe that this business and this segment has a lot of legs here onwards. And the business potentially is at the start of a decadal growth story. As part of that and as part of the institutionalisation of any business and maturing of any business, I think there comes a time for capital market listing once the business has achieved a certain scale. We think we are getting there. We, obviously, need to take that decision along with our joint venture partner, the board and the management team. But broadly, I think the circa timeline that we're thinking about is give or take a year, 15 months from now, we should make a formal attempt at listing and then take it from there.

Moving ahead, from a sectoral point of view, do you expect more consolidation and more participation from private equity players in the health insurance space going ahead?

There are not too many companies in the standalone health insurance segment. But we've seen that in every company, there has been some sort of an interest from private equity players to play a part. Of course, you referred to Star and the transaction that had happened there. But you go through that list and you will see, there has been active private equity interest in the space. And I believe, given that these businesses as they do well, they need more capital. The interest, both on the demand and the supply side, is likely to continue.

You closely look at the financial institution's portfolio of True North. Other than Niva Bupa, you also have Fincare and Fedfina. What's the True North strategy when it comes to these two portfolio companies? One of them had attempted an IPO earlier, then I believe there was a refiling of the DRHP.  Are we looking at IPOs for both of them? Or is True North looking at a dual course, wherein you will explore a stake sale and an IPO at the same time? 

I think both of these businesses, like you said, have matured beautifully. Fincare is a small finance bank and we have been shareholders through two of our funds in that business for a good share of time. We believe that it is one of the best-built small finance banks and its numbers and metrics are tracking well. The business is on a certain journey, and we are very supportive of the journey the business is on. We were the original promoters of the business when it was an NBFC. And as it became a bank, obviously, we are no longer the promoters, but we've been closely associated as a shareholder.

As far as Fedfina goes, this has been, again, another joint venture which we've had with Federal Bank. Federal is the majority shareholder, we are the smaller shareholder. But Federal has been kind to let us come on board and onboard a team, which can build the business, and that team has built a strong business. You are right. We tried an IPO for the business some time back. But the markets, as you know, roughly a year ago, were not as healthy, especially the capital markets for primary issuances. I think they are in a healthier space right now. So, we'll see what happens.  But we believe, again, that business is at a stage where we can create a high quality, small ticket retail led NBFC. And as you know, in the NBFC space, there have been a certain amount of blow-ups in the past five years. So we do believe this is a great opportunity for some of the younger companies while staying focused on the retail space, to grow rapidly.

I want to also get your perspective on the recent increase and spike in equity capital market fundraising activity. We've seen a bunch of NBFCs going ahead and raising funds. What do you make of that trend and beyond health insurance what are some of the other sub-sectors which True North will find attractive in the financial services segment going ahead for fresh bets?

That's a good point. I think if you step back and take a look at the COVID period, which lasted two to two and a half years, right? During that period, while there was some sort of funding freeze for the first three, or four months, but then actually there was a significant flow of funds, specifically into, let's call them COVID-19 positive sectors or some of the consumer internet plays.  So to that extent, a lot of the lending platforms which obviously were partly more impacted did not raise sufficient monies. Now, what's happened is that COVID is, touchwood, fingers-crossed, truly behind us. People have seen a lot of the lending businesses mature, and manage that portfolio because the portfolios have been stress tested. And like there is a cycle in life, there's a cycle in lending. Also right now the credit costs is a little bit low on a cross-cycle basis and the businesses are growing well. So to that extent, not every business has emerged strongly, but the businesses that have emerged strongly are able to raise new money.

From a future perspective, to your second question, we are very focused in financial services. We believe that generally speaking, there are large number of financial products which are underpenetrated even today. For example, a wealth account, a mutual fund account. Even some parts of insurance, some parts of lending are relatively underpenetrated. We like businesses, which are deeply distributed, which own the customer, which are not competing head-on with banks or the larger insurance companies. And those are the kind of businesses we continue to pursue, Ashwin. And that's where we will stay.