Northern Arc — routing funds from investors to users

We have completed 10 years and it was clear that we had established our own identity. It was time to capture that identity in a brand that belonged to us. We looked at all our stakeholders, 500-600 stakeholders, and we did a focussed job of talking to each one of them, running them through the whole logic of why we are doing the brand transformation and what it means. The shift from IFMR Capital to Northern Arc Capital happened surprisingly quickly.

One of the reasons we wanted to change the name was to have an identity that had a little more meaning for us. IFMR conveyed where we came from, but Northern Arc has an interesting history. It is a medieval trade route that connected lands that had access to wealth, property and goods to lands that didn’t have access. It was like a trade route that went over mountains, valleys and rivers. The way the entire trade route history is documented is that it completely transformed the geography it went through. It connected people who had with people who didn’t have. In some ways, it represents what we have done so well. That is exactly the role we are playing – of connecting people who have access to finance with those who don’t.

There is a lot more we can do in these domains. The number of new institutions and clients we are working with has increased significantly over the last quarter. That gives a sense of opportunities that exist. We want to go deeper in these existing sectors. We believe there are other opportunities as well. We have been looking closely at corporate finance. There are SME type businesses that face similar challenges as NBFCs. They have challenges in terms of access to scalable finance. They have funding lines and working capital lines. But you can’t plan a business with simply having access to a working capital line.

You need a little more stable, reliable access to debt. We are looking at going beyond doing a financial institution type business. There are opportunities that might exist in the non-financial space. It is very early days. We are exploring that possibility.

We are working with some of our existing clients to directly originate portfolio on our book. We provide the under-writing framework, they originate the portfolio. They get access to a balance sheet. If they originated it on their books, they have to set aside capital. They have access to the client. Because they don’t have access to capital themselves, their growth gets limited. This is a great opportunity for them to continue accessing that client base and start originating the portfolio on our books.

The other interesting area is our fund management business. It is an alternative investment fund business. It is a 100 per cent subsidiary of Northern Arc called Northern Arc Investments. We run six funds across the asset classes. The funds get launched depending on the investor, what kind of interest the investor has, what is the kind of requirement for underlying tenors. The fund reaches out to a class of investors which is willing to commit debt capital for a longer period. The Northern Arc business, in some sense what we are doing is a lot of capital market transactions. These capital market transactions are high frequency. For example, we might be doing a large number of pooled loan issuances or securitisation transactions or NCDs.

A lot of investors came back to us, saying instead of coming back to me transaction-by-transaction, why don’t I give you a pool of money, why don’t you manage it for me. These are all debt funds. The debt funds invest in all the sectors Northern Arc invests in. We have launched debt funds with 3-10 year tenors. There is no 10-year money in the market. What is important for a lot of our clients is that they have access to reliable capital, because of which they can plan their business.

The AUM of the funds is about ₹1,000 crore. Northern Arc has invested in every fund scheme launched by Northern Arc Investments. We have got SEBI approval for a market-linked fund targeted at high networth individuals. The fund gives us the flexibility to cater a particular issuance that the investor wants. We are in conversation with a developmental financial institution for a potential green fund.

In terms of total numbers, it is ₹48,000-50,000 crore of financing since inception. Most of these have been capital market transactions. Our ambition to become the link between a lot of these underlying sectors and capital markets investors is something we have fulfilled over the last 10 years. We deal with 250-300 institutions, on the investor side and the clients side together.

What we have done in the last 10 years is mainstream this asset class. Today, it is not unusual for a mutual fund to invest in commercial vehicle company or a small business loan company or an affordable housing finance company. Ten years ago one couldn’t even imagine that. We have created a market where none existed. There is plenty of appetite.

There is scope to do more in the sectors we are present in, potentially doing newer opportunities from an origination perspective. From an investor perspective, we have explored the market in India. We have brought Indian investors to an asset class that didn’t exist. It would be great to expand that geographically and go to investors outside the country. There is a pool of investors which would be interested in looking at these opportunities in India from an investment perspective.

In terms of what do we do over the next 10 years, more depth and breadth of these underlying investments is certainly something that we should be doing. There might be ways for us to scale up the business in multiple ways. We see the fund business growing significantly. We see the opportunities for bringing the international investors base into the sectors we work in.

The direction is clear. We built a market that didn’t exist in India for Indian investors and for Indian clients. We believe this could be an interesting market for overseas investors as well.

Absolutely. The company is growing at an interesting rate. It is an NBFC and it is a business that requires capital on an on-going basis. We will be in the market for more equity in 2019.

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