Five Star Finance Becomes India’s Latest Unicorn, Now Valued At $1.4 Billion

India’s unicorn glut from 2020 seems to be extending well into 2021.

Chennai-based non-banking lender Five Star Business Finance has raised $234 million in primary and secondary capital, valuing the company at $1.4 billion. The round included primary capital, and a secondary sale of shares by Morgan Stanley Private Equity. Existing investor Sequoia Capital led the round, investing about $130 million, and Norwest Venture Partners also participated. New investors included private equity giant KKR, which invested about $70 million. This pushes Five Star Finance into the unicorn club, making its the fourth Indian unicorn of 2021.

“In our mission of ‘funding the unfunded,’ we have created a niche for ourselves empowering small businesses and the self-employed across corners of India by providing them with reliable and responsible funding alternatives,” said Five Star Chairman and Managing Director D Lakshmipathy.  “We aim to achieve this social goal through grass-root efforts without compromising on the pillars of asset quality and profitability that are needed to build a sustainable institution of scale,” he added.

Five Star Business Finance isn’t your usual startup — the company itself is older than most of today’s high-flying entrepreneurs, and unlike most startups, is profitable. Five Star Business Finance was founded all the way back in 1984 by VK Ramanathan. Back then, the company was focused on consumer and auto loans. Ramanathan later handed over control of the business to D Lakshmipathy,  a relative.  The company shifted focus to small and medium businesses (SMEs) in 2005, and saw its business grow. Till 2004, it had a loan book of less than Rs 1 crore, which grew to Rs 100 crore by 2012. Since 2012, the company has grown 20 times.

Today Five Star Business Finance has 262 branches across eight states and as of December 31, 2020, had Rs 4,030 crore in assets under management, with gross non-performing assets (GNPAs or defaults) of just 1.29 percent. “Our customers include all the way from small shop owners, flower vendors, maids, masons to small and medium enterprises that form the backbone of India’s economy,” the company says. The company’s operations are primarily focused in the south, with Tamil Nadu, Karnataka and Andhra Pradesh accounting for 96 percent of its disbursements. For FY20, Five Star reported a net profit of Rs 261.9 crore on a total income of Rs 787.3 crore compared with a net profit of Rs 156.7 crore on a total income of Rs 408.9 crore for FY19.

All manner of apps now seem to want to enter the lending space — credit card payment app Cred is getting into lending, and companies as varied as Ola, Amazon, and Xiaomi are getting NBFC licenses . This appears to be for good reason — well run companies in the lending space seem to be acquiring large number of users and making money. And the entry of an NBFC like Five Star Finance into India’s unicorn club will likely spur even more interest in the fledgling sector.