KKR's India NBFC, InCred set for all-stock merger

KKR & Co. has agreed to an all-stock merger of its India lending unit KKR India Financial Services (KIFS) with InCred, a shadow bank promoted by former Deutsche Bank officials, ending nearly 10 months of negotiations, said people aware of the matter.

The union will help the private equity group save the struggling arm once touted as an alternative model that would be expanded across Asia but got mired in bad loans, personnel exits and rating downgrades. The move will help InCred scale up its loan book, especially in the wholesale segment, and get access to KKR’s deep financial resources.

KKR, along with its two limited partners Teacher Retirement System of Texas and Abu Dhabi Investment Authority (ADIA), will end up owning 33-35% of the merged entity, while InCred and its promoters will own the rest, said the people cited above. For every two KIFS shares, investors will get one of InCred.


The merger will value KIFS at about Rs 6,000 crore, a fourth of its valuation in 2018, when it had plans for a public issue.

Major individual shareholders in the merged entity include InCred cofounder Bhupinder Singh, who used to be a corporate banker at Deutsche Bank, former Deutsche Bank co-CEO Anshu Jain and Manipal Group chairman Ranjan Pai.

Other institutional investors include Investcorp, Paragon Partners, Elevar Equity and Dutch development financial institution FMO. The Mumbai-based firm, which is aiming to be a full-service financial institution, has raised more than Rs 1,000 crore from investors since its 2017 inception.

InCred and KKR signed an exclusivity agreement on the proposed merger in July last year. ET was the first to report on negotiations on July 23.

KKR and InCred declined to comment.

“The new entity will be using the InCred brand name for all its business purposes. However, the KKR affiliation will help the entity with deep access to capital,” said one of the persons cited above.

KKR launched a dedicated NBFC in 2009 as part of its India-specific strategy. KIFS focused on wholesale lending, including promoter financing and mezzanine and acquisition financing, and hence has sizable single-borrower exposure. This was a unique business proposition under then India CEO Sanjay Nayar, who had headed Citigroup in India and Southeast Asia prior to joining KKR. The strategy was to be expanded across Asia and other emerging markets. Nayar is now chairman of KKR India.

The company expanded its loan book at a compound annual growth rate (CAGR) of 35% to Rs 5,694 crore on March 31, 2019, rising to Rs 5,878 crore by the end of the next quarter. KIFS underwrote more than Rs 8,100 crore in financing, while KKR India Asset Finance, the real estate credit business, did so to the tune of Rs 4,200 crore in 2018 alone.

“Given the inherent business nature, the concentration in the portfolio remained high with the top 20 borrowers constituting 52% of the loan book,” rating agency Crisil said in October 2019 while downgrading the company with negative implications. The downgrade was primarily due to deterioration of the standalone credit profile and the resultant pressure on asset quality.

The merger is expected to give KKR a fresh lease of life in the Indian credit market, which it still considers as a “strategic and important segment.”

“The KKR problems compounded because of the IL&FS crisis and the general liquidity crisis,” said another of the persons cited above. “At least two of the portfolio firms are facing bankruptcy proceedings under the IBC (Insolvency and Bankruptcy Code). So the deal will save them for the time being.”

Meanwhile, KKR will continue to pursue its aggressive private equity investment strategy, as part of which it has already deployed about $6 billion.

InCred will gain access to more capital. “With ADIA and Texas coming on board, InCred will also benefit from a unique capital proposition,” said another person.