Exclusive: Kedaara in talks to back lending startup Aye Finance

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Homegrown private equity fund Kedaara Capital is in early discussions to invest about Rs 300 crore in small-business lender Aye Finance, valuing it at about Rs 2,200 crore, said three people on condition of anonymity.

Started by Sanjay Sharma in 2014, Aye Finance typically infuses Rs 1-2 lakh into businesses with an annual turnover of Rs 10-30 lakh. It underwrites the risks in these loans with a unique cluster-based model, wherein it evaluates all the people in a particular field and correlates behavioural tendencies.

Terms of the deal, including valuation and the amount are being discussed and have not been finalised yet. Aye and Kedaara did not respond to emails seeking comment.

Like most lenders, Aye has stopped fresh disbursements due to the COVID-19 outbreak.

"They were disbursing about Rs 150 crore a month in February and March until the lockdown was announced. Depending on when businesses get back in order, they will look to restart lending at the same levels in the next 3 months," said one of the people cited above.

About 50 percent of its customers comprise grocery and dairy companies, which have managed to evade the brunt of the pandemic, and in some cases, have seen a surge in orders.

Its most affected customers include manufacturing businesses which make items such as glassware, shoes, etc, and were among its customers who delayed payments or made part payments in March and April.

"Their collections for March and April were better than expected. But May will see a large fall in income. They have built multiple scenarios because it is still uncertain when the business will see some normalcy," said the person cited above.

Aye has also been one of the better capitalised non-bank lenders and startups, raising equity and debt consistently. It has raised about Rs 1,300 crore of debt so far from global impact investment managers TripleJump BV and MicroVest Funds, as well as  Swiss fund manager responsAbility and domestic lender Northern Arc Capital.

Its other investors include venture capital firm SAIF Partners, Accion and Capital G - Google's investment arm. In January this year, A91 Partners invested $20 million in the company by acquiring the shares of Accion in a secondary transaction.

For the financial year ended March 31, 2019, Aye Finance logged in revenue of Rs 209 crore, compared to Rs 79 crore in the preceding year, according to its annual filings, accessed via data platform Tofler.

It recorded a profit of Rs 25 crore for FY19 compared to no profit and no loss in the previous fiscal.

Kedaara Capital has been on a deal-making spree in the last 6-8 months, particularly in the financial services segment. It backed small business lender Veritas Finance and Religare Health Insurance this year.

Kedaara was founded in 2011 by former Temasek Holdings Pte India head Manish Kejriwal, along with Sunish Sharma and Nishant Sharma, who were, respectively, Managing Director and Principal of global PE firm General Atlantic in India. In 2017, it raised $750 million for its second fund.

"Kedaara is investing in Aye despite a crisis like this because it is taking a long term bullish view on the lending sector, and the company itself has underwritten loans without excessive risk," said another person tracking the company.

India's small and medium businesses, traditionally starved of capital have seen dozens of fintech startups emerge to tackle the issue- from originating loans online to providing goods and raw material instead of money alone. However, with multiple companies having similar business models and no path to profits, analysts expect consolidation in the space- especially during this crisis where most companies are at zero revenue for a prolonged period of time. This will involve some firms being forced to shut down operations, while others will sell out to larger companies.