Addressing the needs of the ‘Missing Middle’ – TSGF3 invests ₹100 Cr in Five Star Business Finance Ltd

We are pleased to announce the completion of our 5th investment from TVS Shriram Growth Fund- 3 (TSGF3) in Five Star Business Finance Limited. Our INR 100cr investment for ~0.97% stake in the NBFC highlights our continued objective of financing SME lenders who are solving for the problem of “access”. Accordingly, Five Star Finance has a remarkable track record of successfully addressing the needs of the so called “Missing Middle” segment in MSMEs. This segment comprises of 53.3 million “own account enterprises”, of which a majority do not have any form of registration nor do they hire external labour on a regular basis.

Upon taking control of Five Star Finance in 2002, computer science engineer and first-generation entrepreneur – D Lakshmipathy, steered the company’s focus towards SME lending from its initial core business of consumer financing. The company underwent a significant business transformation under his leadership to eventually became a pioneer in the small business lending space. The NBFC primarily operates in the small business loan segment (₹ 3-5 lakhs ticket size), with loans backed by self-occupied residential property as collateral.

Five Star Finance has built up a strong presence in South India and demonstrated a 9x growth in AUM over the past 5 years. Moreover, the company has achieved this while continuing to maintain best-in-class operating and financial metrics. This coupled with the company’s superior returns, cost to income ratio, and robust asset quality prompted TCF to actively track the company over the past 12 months. We believe Five Star is well poised to deliver high growth in the next 5 years, leveraging its strong market practice and operations excellence.

In this composite round of ~₹ 1,700 Cr, Five Star has raised ~₹ 520 Cr of primary investment as TCF joins KKR along with existing investors Sequoia Capital and Norwest Venture Partners. This investment marks yet another testament to our investment philosophy of backing the best NextGen entrepreneurs across businesses. We deeply subscribe to Mr. Lakshmipathy’s vision of building Five Star Finance into a pan India NBFC which will be among the top decile of players in this category. More importantly, we are proud to partner a company with a strong ESG framework, which is in line with TCF’s focus on building sustainable enterprises in the long run.

Team TVS Capital

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