IFC is actively mapping the early-stage funds space: Nupur Garg

t International Finance Corporation’s regional head Nupur Garg says investing in early-stage funds is a long-term relationship that goes beyond one fund


Nupur Garg, regional lead, South Asia, private equity funds at International Finance Corp.
Nupur Garg, regional lead, South Asia, private equity funds at International Finance Corp.

Mumbai: Nupur Garg, regional lead, South Asia, private equity funds at International Finance Corp., talks about the growing interest of the organization in early-stage venture funds and how they provide another route to tap into India’s growth as traditional growth equity funds underperform. Part of the World Bank group, IFC is one of the biggest investors in India, backing roughly two-thirds of the active growth funds investing in unlisted small and mid-cap companies.

Edited excerpts from an interview:

What is the interest of institutional investors towards early-stage venture funds?

 Institutional investors have been interested in backing early-stage funds for some time now.

A large part of this has come from investors with global mandates for investing in the early-stage space, where they have seen success in more developed markets such as the US and therefore, arguably had the ability or foresight to invest early into markets like China and India.

With the increasing speed of tech and mobile penetration in India, evolution of the early-stage ecosystem and strengthening of the quality of the opportunity, this interest is deepening. A case in point is the broadening of IFC’s own funds investing programme to include early-stage funds.

We are actively mapping the early-stage funds space and looking to add high quality fund managers to our portfolio of relationships.

I think the early-stage funds space is fairly segregated between the more established funds that have institutional backing, and the smaller funds raised on the back of sharp HNI (high-net-worth investors) interest in this space.

The beauty of this segregation is that it allows different strategies and approaches to be played out in this market.

In fact, early-stage funds have access to a large pot of domestic institutional capital that is not so accessible for various reasons to the traditional growth equity funds. As of H1 2015, 43% of the funds-raised was for venture capital, vis-à-vis 36% growth equity and 20% buyout. More capital was raised for India-dedicated VC funds in first six months of 2015, than was raised in any single year between 2006-2013.

What is appealing about such funds to investors?

At IFC, I think one of the most appealing things is the ability to be part of the tremendous growth story that India has.

Tech-based models have the ability to create reach and access at a far greater pace, allowing people from all parts of the economy to participate and benefit. As an LP (limited partner), one also considers the risk-reward equation for various strategies. We all know that Indian growth equity funds have generally under-performed.

We can debate endlessly on who and what is to blame, but the fact is that the industry as a whole has so far not delivered the promise of the underlying growth in the market.

Early-stage funds offer another route to tap into this growth and make out-sized returns.

Plus there is experience and proof of concept available today, investing discipline is coming back in and valuations are coming closer to sanity. This coupled with the availability of high quality start-ups makes early-stage funds an attractive investment option for LPs.

Challenges do exist in ensuring long-term sustainability of the underlying businesses in which investments have been made and in creating exit avenues; you clearly have to find the right team to back.

The other thing is the advent of new teams and new funds with a focus on early-stage investing in India.

You have to catch them young. Investing in early-stage funds is a long-term relationship that goes beyond one fund as follow-on funds increasingly deploy capital into existing portfolio companies and the path to realizing value transcends the life of the fund that was invested in first.

Early-stage activity has exploded (while growth equity has declined), growing at 20% since 2008 thanks to the shifts in demand for capital within the entrepreneurial environment. And the number of early-stage fund managers has more than doubled—venture capital is fast eclipsing growth equity as the dominant form of investment in India.

How much will IFC commit to India this year?

We deploy about half a billion dollars every year in emerging market PE and VC funds. India is one of IFC’s key markets and also its largest exposure.

But investing in funds is about backing people in addition to backing a market—we are not approaching this with a fixed number in mind. We want to focus on backing strong teams without pressures of under or over allocation. 

How much have you committed to Indian PE/VC till now? 

Our commitments to active funds in India currently stand at $635 million. We are actively looking at 4-5 growth equity funds as of now.  

What kind of funds do you look to invest this year and why? 

In addition to looking at backing a couple of early-stage fund managers, we will continue to invest in growth equity funds where we will look to selectively back high quality fund managers with a demonstrated ability to create value for both their investees and investors.  

Give us a sense of what global institutional investors are thinking about Indian private equity? 

India’s robust GDP growth, improving clarity in tax and regulatory matters and the challenges faced by several other large markets (that sometimes compete for allocations), makes a strong case for investing in India.

At the industry level, LPs (limited partners) are seeing liquidity now and the 2010-2012 vintages seem to be maturing well. Also, the industry has matured now since the much-battered 2007-2008 era. Fund managers are more experienced and LPs have the ability to dig into track records.

As per the 2016 EMPEA’s Global LP survey: India has jumped from ninth position in attractiveness for GP (general partner) investments in 2013 to second position in 2016.

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