ADM Capital provided structured debt financing to India-based lending platform KrediBee in 2019 on the coattails of a string of Chinese equity investors. By the time the debt portion was redeemed in 2021, regulatory issues had prompted a change-up in the cap table as Chinese money was replaced by Indian money. By the time ADM exited the equity piece a couple of months ago, KreditBee was preparing for a domestic IPO.

“They saw the writing on the wall in terms of regulation. The politics between India and China could have impacted them because they had become a too-big-to-fail institution and very much under the eye of the RBI [Reserve Bank of India],” said Sabita Prakash, a managing director at ADM.

“If the entire cap table had been replaced in one slug with many different entities that might have been a problem, but they had always planned to include more Indian investors. I don’t think they could have replaced the Chinese investors so quickly if talks had not already been advanced. They were sensible in terms of diversity, did it in a gradual fashion, and so it didn’t cause havoc.”

ADM was also encouraged by the caliber of investors coming in. Premji Invest featured in the first wave, accompanied by the likes of Motilal Oswal Alternatives, Mirae Asset Venture Investment, and TPG NewQuest. They contributed USD 225m across two rounds in 2021 and 2022. A year later, Advent International put in USD 100m, cementing KreditBee’s rise from start-up to platform of scale.

Attractive return

ADM’s final exit was entwined with another regulatory hurdle. Its investment – USD 20m in debt and USD 2m in equity, the latter achieved by exercising a warrant attached to the former – was in KreditBee’s offshore holding entity. This was folded into the India operation to facilitate an onshore IPO, a task undertaken by numerous new economy players keen to leverage red-hot capital markets.

According to Prakash, ADM’s 1.37x return “ranks very high” in terms of the expectations of an Asia-focused credit fund. While the equity portion juices the money multiple, it generally creates a drag on the IRR because the holding period is longer than for pure debt. The firm’s IRR is 17.9%, which is in line with the mid-teens outcomes that come from a debt-plus-equity arrangement.

As of March, KreditBee was serving over 10m customers – typically professionals who receive personal loans of up to INR 400 (USD 4,750) within 10 minutes of making an application – and generating USD 300m in annual revenue and USD 40m-USD 50m in profit. When ADM invested, the company had around USD 100m in revenue and was turning a marginal profit on a pre-tax basis.

Originally known as KrazyBee and aimed at students and recent graduates, it had raised USD 10m across two rounds of equity funding in 2016 and 2017, AVCJ Research’s records show. Participants included Chinese VC firm Shunwei Capital plus a handful of Chinese strategic investors (mobile advertising player Yeahmobi, installment payment business Fengqile, and appliances brand Xiaomi, among others).

At the time of ADM’s entry, KreditBee didn’t lack funding options, Prakash explained. Chinese investors were willing to contribute more equity, while Indian banks and non-bank financing companies (NBFCs) were ready and waiting on the debt side. ADM brought a degree of recognition – proof that the company could raise equity and debt internationally – and an element of flexibility.

“As far as debt was concerned, not many lenders were willing to give them a slug of money for 2-3 years, so they were attracted to us,” Prakash said. “The money they were raising was in small amounts, less than USD 5m, tenors were short, maybe a year or just over a year, and facilities were amortising almost as soon as they were taken on.”

Into the less-known

This was an atypical investment for ADM, which had until then largely backed traditional industrial companies in India; the new economy was relatively uncharted territory for private credit players. The firm was reassured by the presence of a Chinese investor with which it had a preexisting relationship. Beyond that, KreditBee’s business fundamentals were appealing.

First, the company had a conservative approach to balance sheet management, imposing a cap on leverage of 1.5x equity value – in practice, it stayed below 1x – while most NBFCs were running at 4x or more. Second, its approach to asset-liability matching stood out.

“Most NBFCs were investing in infrastructure at the time, so assets were long-dated, liabilities were short-dated, and they got into trouble. KreditBee was making two-month loans to urban professionals – financing the purchase of appliances and other things – so assets were short-dated,” said Prakash.

“In many cases, these consumers were not credit-rated by the domestic banking system, which meant there was an element of financial inclusion as well. We look for opportunities where we can fund ESG [environment, social, and governance] incrementality.”

In ADM’s eyes, KreditBee also distinguished itself during COVID-19. The company ceased all disbursements and went into collection mode, reasoning that the length of the pandemic, and the disruption to business, was difficult to predict. Revenue fell by half, but then gradually rebounded.

The investment was predicated on the need for scaling capital, not funding M&A or working capital needs. While ADM continues to look for similar openings, Prakash describes the firm’s strategy as looking for financing gaps – the challenge being that those gaps keep changing. New economy businesses are now well served by an ever-expanding universe of domestic credit providers.

“Fintech, whether that is lending or other technology, is still on a tear in India, so we see numerous deals,” she added. “But KreditBee has spoilt us, and we find ourselves asking for the moon.”