Mumbai: Large investors are placing their bets on early-stage venture capital funds to earn higher returns after investments in private equity (PE) funds failed to meet their expectations.
Returns expectation of investors from their investments in PE funds have dropped to as low as 15%-18% now from 22%-25%, according to three limited partners (LPs) Mint spoke with.
The LPs have so far invested their money in larger funds.
High valuations of companies and rising competition in the PE market that sometimes lead to auction of deals are forcing LPs to turn to early-stage funds, according to Ajit Kumar, managing director of Evolvence Capital, a West Asia-based fund that invests in other funds.
“We thought we would mix our strategy now and decided to allocate 5-10% of our fund to early stage firms,” said Kumar. Evolvence is raising a $400 million fund to invest in other private equity and venture capital funds.
Early-stage funds typically sell their investments after six-seven years or sometimes even later, unlike PE funds which exit in four–five years. Their returns are, however, as high as 35%.
Inflation, rising interest rates, volatile stock markets and corporate governance issues in India have also affected the expectation of returns.
These issues have delayed exits of many private equity firms, which had invested in 2006-2007 and wanted to sell their holdings now.
CDC Group, the development finance arm of the British government, which has so far deployed about $1.2 billion in India, is also looking to invest in early-stage funds to diversify its risk and earn higher returns.
“Valuations are moving down to the early-stage funds, who are saying that the larger funds are willing to do smaller deals at three-four times their value,” said Anubha Shrivastava, managing director, Asia, of CDC in an interview earlier this month. “The value is still there in venture investments.”
In 2010, CDC made its first investment in an early-stage fund called Seedfund. It invested $13 million in the firm that is raising $52 million.
There are many early-stage funds in the market to raise money.
“We are examining them and might invest in some of them,” said Shrivastava.
The developing angel network across cities and the fact that there have been successful exits by angel investors, have made LPs sit up and take notice, according to Kumar.
The angel investments provide a good pool of start-ups that can be invested into by VCs, when the angel investors exit, he said.
Since its inception, the Indian Angel Network has invested in 23 companies and has already made five full or partial exits.
Mumbai Angels has made over 35 investments with seven exits.
One of its most successful investments was in InMobi, a mobile networking start-up, in 2007. It invested $500,000 and sold its share in January 2010 to VC investors.
Since their investment in 2007, the valuation of the company has risen more than 25 times.
At the same time, some VCs are sitting on unrealised returns. SAIF Partners-backed MakeMyTrip Ltd, an online travel portal, raised $70 million after listing on the Nasdaq last year.
“My sense is that in certain sectors like Internet and mobile, India will hit an inflection point and it is just a matter of time. LPs are seeing that wave coming and want to take advantage of it,” said Rajan Mehra, managing director, Nirvana Venture Advisors—India’s first early-stage venture capital fund focused exclusively on the digital (mobile and Internet) and electronic markets. Nirvana is in the process of raising a $75 million fund.
The venture allocation by LPs will only increase, according to T.C. Meenakshisundaram, managing director of IDG Ventures India. “We are actively working with LPs in terms of sharing details about exits and returns.” IDG is looking at raising its second India fund of $150-200 million.
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