Carlyle bets on Indian brokerages

Last Updated: Thu, Nov 17, 2011 06:21 hrs

Says consolidation inevitable in sector, sees big returns ahead; other observers believe likewise.

Indian brokerages are facing a drop in cash market volumes and reduced investor appetite. However, this has not deterred Carlyle, the private equity giant, from betting on some of the biggest names in the industry, as it expects a windfall from a possible consolidation. In the recent past, Carlyle acquired a significant minority stake in India Infoline (IIFL) and Edelweiss through open market deals. Its recent stake buyouts have been termed a strategic move, to reap a high return when consolidation takes place in the Indian broking industry.

"We do expect the retail broking industry to consolidate. At current levels of volumes and yields, the business models of smaller-sized brokerages are unviable," said Devinjit Singh, managing director at Carlyle Group. Last month, Carlyle increased its stake in IIFL to nine per cent from 6.7 per cent through an open market deal. Carlye invested about Rs 200 crore for the stake, which was made by Carlyle Mauritius Investment Advisors Ltd, a part of Carlyle Asia Partners (CAP). Also, Sunil Kaul, senior director with Carlyle Group, joined the IIFL board as a non-executive director. Last month, Carlye also bought 3.85 per cent in Edelweiss Financial Services from the open market for Rs 86 crore.

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"There will be a certain amount of consolidation in the broking industry. The more time it takes for markets to revive, more the chances of consolidation," said C J George, founder and managing director of Kochi-based Geojit BNP Paribas Financial Services. "Brokerages with very good control over cost will be the ultimate winners. They will make a killing when the market improves."

George said for smart investors with a long-term horizon, this is probably the best time to buy equity stake in brokerages. "If one has to buy, one has to buy during the worst times," he said.

Apart from Carlyle, Edelweiss has other PE investors in the company such as the Singapore Government-owned GIC (holds 8.23 per cent), Greater Pacific Capital (5.15 per cent), Argonaut Ventures (1.54 per cent) and Sequoia Capital India (1.03 per cent).

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To diversify their revenue base, leading Indian brokerages are increasingly tapping newer areas. Edelweiss has entered into a joint venture, Edelweiss Tokio Marine Life Insurance, with Japan's Tokio Marine. It had also launched a housing finance business last year.

IIFL is expanding its retail assets business, comprising margin loans, loans against property and gold loans. "This will accelerate the transition of the company into a diversified financial services one. We believe we have made our investment at an attractive entry point in the evolution of the company," Devinjit added.

List of PE deals in broking firms from 2010-11 YTD

Date Target Buyer PE type

Deal value
($ mn)

15-Apr-10 Convexity Solutions Pvt. Ltd. CX Partners Venture capital


4-May-10 Cholamandalam Investment and
Finance Company Ltd.
Finance Corp.
Private Equity 22.51
6-Feb-11 SMC Global Securities Ltd. Sanlam Investment
Management Pty Ltd
Private Equity 9.10
20-Sep-11 India Infoline Ltd. Carlyle Asia Partners III Private Equity 17.70
28-Oct-11 Edelweiss Financial Services Ltd. Carlyle Asia Growth
Partners III
Private Equity 17.34
Source: VCCedge

With increasing cost of operations and higher compliance requirements, survival has become difficult for small and mid-sized brokerages. This, experts say, will lead to consolidation.

"In the current scenario, it is imperative, with acquisition opportunities available for large players," said Sanjay Doshi, director–transaction services, KPMG India. "There is a general belief of turnaround over the coming years and broking firms with the ability to sustain would typically like to remain in the business. Also, valuation is a challenge, which is a big impediment for such deals."

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