Pepper Global to start lending business in India via acquisition; seeks opportunities in Japan too – CEO

Interview 10 April

Pepper Global to start lending business in India via acquisition; seeks opportunities in Japan too – CEO

Pepper Global, an Australia-founded lending and loan services group majority owned by KKR, is looking to start lending in India in the next six to nine months after completing a small acquisition, CEO and founder Mike Culhane said.

Pepper, now headquartered in Singapore and with USD 76.2bn in total assets under management (AUM), currently serves India via its Pepper Advantage business, which is a global credit intelligence provider managing credit assets on behalf of clients.

The group is now acquiring a small non-bank finance company (NBFC) in India. The deal is pending approval and Pepper will build the lending business on it, Culhane told this news service. Without disclosing the deal size, he said such acquisitions are usually quite small as Pepper is just buying the local entity to enter the market.

“We believe we have the capability to scale businesses, therefore it does not make sense to pay for something that is already scaled,” he said. “So we will buy something small, and use that foundation to grow.”

Likewise, Pepper is also thinking of starting a direct lending business in Japan and will be looking for similar opportunities there as well, Culhane said.

However, it is not looking to buy Tokyo Star Bank, which Mergermarket reported previously was being considered for a potential divesture by Taiwanese owner CTBC Financial Holdings [TPE:2891], he said.

In general, Pepper Global is on the lookout for small bolt-on M&A opportunities to cover a segment that it does not already cover, the CEO said. “We normally do this in a way to look at what is the market that we want to get into or a product we don’t currently have. How do we buy that capability and then really scale it,” he explained.

For example, it is looking at a couple of technology players in India to help with its Pepper Advantage business, as well as a variety of different areas in Japan, he noted.

Global portfolio

Pepper, founded more than 20 years ago in Australia by Culhane, now has a global network of businesses in different jurisdictions. It still owns 60% of Pepper Money [ASX:PPM] in Australia after the Australian/New Zealand non-bank lending business was floated in May 2021.

The group’s biggest business outside Australia is Pepper Savings Bank South Korea, one of the top five mutual savings banks in the country, according to the CEO. Pepper Savings Bank will continue to use the edge it has on digital analytics of consumer data to achieve scale, by increasingly using digital tools and techniques to attract new customers. The bank now has USD 4.3bn in AUM with 260,000 customers, as per the company’s website. It is “highly profitable”, Culhane said.

In the UK it deliberately slowed down its non-bank, mortgage lending business Pepper Money UK in the second half of 2022 due to the mini-budget that caused market chaos, but now “we are putting our foot on accelerator again”, the CEO said, adding that Pepper Money UK is planning to do a securitization in a couple of weeks. The business has a bright future as its competitors have been impacted by the mini-budget last year, he said, adding that one of the company’s largest competitors Kensington Mortgages was sold to Barclays.

Pepper Advantage, the business that manages loans on behalf of banks and other investors, is active in the UK, Ireland, Spain, Greece, India, Indonesia, with a small operation in China and Japan, Culhane said, noting that the growth opportunity in Asia is significant. Pepper Advantage has developed unique technologies that are built on a global basis and “transferable from one market to another”, he said, adding that some clients want to buy that technology from Pepper. This is a “capital light and fee-generating business”, according to the CEO.

The group also has a small business in Spain, Pepper Money Spain, which does point of sale and personal loans, he added.

Paths ahead

The CEO acknowledged that the next six to 12 months will certainly be a challenging period with “everyone holding their breath” to see how higher interest rates are affecting consumer spending. “We should be very cautious in new lending, very cautious around managing existing customers and responding quickly if they get into difficult situations,” he noted.

The flipside, however, is that Pepper Advantage always does well during a period of distress as the banks are always looking to either sell or get help with non-performing loans, he continued. “We are not necessarily buying those loans ourselves, but we can find investors that can buy those loans, and then we can manage on behalf of banks or the investors,” he said.

When asked about future exit plans of businesses outside Australia, Culhane said KKR, being a supportive partner, would look for an exit at some point in a few years, although that is “not anticipated in near future”. An exit could be a share market float, sale to strategic buyer or other PE, or any combination of those, he said.

A spokesperson for KKR declined to comment on exit strategies of individual investments. “We believe that Pepper Global and each of its subsidiaries is a great business, which provides meaningful financial solutions to customers in markets worldwide. We are committed to supporting the business to achieve its goals,” said the spokesperson.

KKR acquired Pepper in 2017 for AUD 675.2m, according to Mergermarket data. As per the prospectus for Pepper Money IPO in 2021, KKR owns 65.6% of Pepper Global, while minority investors own 27.26% and the management 7.14%.

Pepper Global currently has USD 55.1bn in servicing AUM and 21.1bn in lending AUM, 3,650 employees and 2.5 million customers globally, according to its website.

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