Mumbai: Private equity (PE) firms are emerging as an important source of capital for internet and software companies in a late-stage market dominated almost entirely by SoftBank Group, Naspers Ltd and the Chinese internet giants Tencent Holdings and Alibaba Group.

PE funds typically stay away from money-losing start-ups but as internet companies such as Lenskart, BookMyShow, Livspace and others have reduced costs while still growing sales rapidly, these companies have attracted interest from PE firms.

It helps that companies like eyewear retailer Lenskart and interior design platform Livspace are no longer internet-only companies. They have opened dozens of stores and now get a large part of their business from stores, which makes them look like traditional retailers. PE funds typically invest in such businesses rather than purely digital firms.

Apart from TPG, Carlyle and Warburg Pincus, firms that already have start-ups in their portfolio, General Atlantic is also looking at investing in late-stage start-ups, people familiar with the matter said.

“Over the past two years, startups have improved their unit economics and demonstrated that they can become profitable while still growing at a fast clip—this reduces the risk involved for a PE firm," said Karan Sharma, executive director & co-head, digital & technology, investment banking at Avendus Capital. “The business model of companies like Lenskart has evolved and they have become retail companies. That’s what PE firms are investing in. PE firms are looking at these companies as sector plays rather than as pure internet investments."

Sharma added that these companies are far less risky investments for PE firms now then it was two years ago. “PE firms generally look at 1:3 returns unlike VC (venture capital) firms who have an outlook of 0 or 10. Several consumer internet companies are at a stage where it’s very clear that they will survive and they have become either market leaders or are No.2 or No.3 in their space, either offline or online. Because their business models are now much more solid than they were in the past, PE firms are a lot more comfortable with taking the leap," he said.

Avendus was the banker for some start-ups that have raised PE capital including Lenskart, BookMyShow and Delhivery.

Before 2018, Warburg Pincus had the most number of start-ups in its portfolio including Quikr, CarTrade and Ecomm Express.

Over the past year TPG has increased its start-ups bets. Apart from increasing its stake in Lenskart, it led a $100 million funding round into ticketing and entertainment platform BookMyShow this week. TPG and RNT Capital are in talks to invest in Livspace, two people familiar with the matter said. The Times of India newspaper had reported TPG’s interest in Livspace earlier. Mint had reported on 20 June that Livspave was in talks to raise $50 million from Verlinvest, Ratan Tata’s UC-RNT Fund and existing investors. But Verlinvest has decided not to invest in the proposed round, the people said.

The renewed interest of PE firms in start-ups is important as start-ups have sources of capital at a late stage. Many hedge funds that were investing in mature start-ups in the funding boom of 2014-2015 have either disappeared from India or have cut back sharply. This leaves only a handful of late-stage investors such as SoftBank, Naspers, Tencent and Alibaba. PE firms provide an important alternative to these internet investment behemoths.

To be sure, while PE firms have increased their investments in start-ups, it’s clear that they will be selective investors. They tend to pick safe bets and favour companies that generate significant cash flow. There aren’t that many startups that fit PE criteria.

“If you closely assess the start-up investments made by PEs you will see that there is a broad trend of them picking companies that are reasonably mature or have a virtual monopoly in the segment. These will be largely firms who are already No.1 or 2 in their respective fields," said Sanjeev Krishan, PE and deals leader at PwC India.

According to him, mature start-ups prefer PEs not just because of the money they bring to the table but also because of the expertise of running similar businesses globally. “Needs of a start-up in 0-5 years are very different from 6-10 years in the lifecycle. PEs traditionally are known for bringing global experience to the table."

Close