The look and feel of the ‘Indian’ VC fund

With more than $125 billion of capital under management, the venture capital (VC) and private equity (PE) industries in India are no longer a side show. Yet little is known about the organisations behind these investments, except that they are either much celebrated for their successes or just as vilified for their alleged failures.

Our research during this summer threw some light on these funds, beyond the names of the usual favourites that make it to the press regularly.

VC and PE investments are made by funds that are managed by specialised fund management entities. Based on data from Venture Intelligence, we find that between 1999 and June 2017, 933 fund management entities (FMEs) provided 6,118 rounds of funding to the 3,900 enterprises. This supports the commonly held view that most early-stage enterprises require more than one round of VC financing as they grow.

Each investment fund pools its capital into a special purpose vehicle (SPV). The SPV and the capital contributors to the fund, known as Limited Partners (LPs) enter into a management agreement with a firm of professional investment managers who are the FMEs. An FME may manage more than one fund at a time, each with a different set of LPs and a different investment thesis, although it is not essential that the funds should have distinctive investment theses or investors.

LPs decide on where to incorporate the SPV to minimise tax outgo for LPs and ensure ease of doing business for the fund and its investors. Over the years Mauritius has emerged an important location for funds investing in India.

Close to 90 per cent of the funds that flow into Indian VC and PE are of foreign origin. This means that the investors in the funds are from outside India and that the funds are registered outside India. Till about five years ago that used to be as high as 98 per cent.

These estimates are not precise or reliable for various reasons, the most important being that most of the funds are not mandated to disclose data about their operations.

A large number of investments are made from funds that are raised exclusively for investing in Indian companies. However, many investments are made out of funds that are meant to be invested across a broader geography, including India. That adds to the complexity of analysing data on the Indian VC industry.

FMEs investing in India vary considerably in their level of activity. Half of the 933 FMEs made three or fewer investments, the average number of investments was just nine, while 292 FMEs among them made just one single investment.

Building financially attractive VC or PE portfolio requires considerable investment in the process of sourcing investment opportunities, evaluating them and managing the investments.

Extremely small portfolios make such investment in the fund management process unviable for funds.

Another important feature is the churn among FMEs. As of June 2017, only half of the FMEs were still actively investing. A staggering 50 per cent or more of the FMEs seem to have not made an investment for two years or more by that time.

These findings suggest the possibility that VC and PE investing in India comes with a high risk of eventual exit for the FME.

FMEs investing in India seem to fall into four broad organisational types. They may be either of foreign origin or completely home-grown. They may be part of a larger financial institution or corporate organisation or a family office. Alternatively, they may be an entrepreneurial team of investment professionals.

Some FMEs have an investment team on the ground, dedicated to investing in India; whereas some funds run their India activities from their regional offices. The presence of an investment team on the ground would be highly helpful, if not absolutely essential, for post financing engagement that is a sine qua non in early-stage investing.

Net net, there is a fairly large and interesting spread of FMEs, making new investments in India and harvesting successful ones. At last count they had exited from 920 such successful investments.

Yet little is known about the linkage, if any, between the type of FMEs and their performance. A robust understanding of this connection is hampered by the woeful lack of data. More liberal sharing of data would facilitate a better appreciation of the industry’s impact as a source of risk capital.

G Sabarinathan, PhD, teaches at Indian Institute of Management Bangalore. Shrinitha Thiyagarajan is a final year student at NIT Tiruchi. Views expressed are those of the authors.