TVS Capital joins the search for AI-powered IT disruptor

“A lot of our investing DNA has been more focused on enterprise versus consumer, especially over the last 1-2 funds. Additionally, technology is a future-ready theme that we can invest in over a 10- to 15-year period, which will pay dividends going forward," Naveen Unni, managing partner at TVS Capital Funds, told Mint.

“AI-first business process outsourcing startups are one of those next-gen opportunities," said Unni. “Think of it like an Indian partner to a US venture capital firm. They have the cutting-edge technology, we have the BPOs and can find a way to integrate these to provide a better and more productive customer experience."

The growth equity fund’s focus on enterprise tech investments reflects the investor spotlight on IT services as the $283-billion industry faces an artificial intelligence (AI)-driven upheaval. Several funds, including Peak XV Partners, Stellaris Venture Partners, Accel, and Elevation Capital, are targeting early-stage startups that aim to transform the offshoring sector. Most recently, Bessemer Venture Partners announced a new ‘AI in IT’ investment road map.

“Growth equity's entry into this space is to get in early on the disruption," said Tarun Pathak, research director at Counterpoint Research. “It's still going to take some time as there's a lot of uncertainty in how things will shape up. For private equity, it’s more like keeping a very close eye on things."

Prior to adding enterprise technology as a new thesis for its fourth fund, TVS Capital Funds also evaluated investing in consumer and healthcare bets–it has backed the likes of Nykaa and MaxiVision Eye Hospitals in the past.

₹300 crore bets

The TVS Shriram Growth Fund IV currently has commitments of over ₹3,500 crore and expects the pool of available capital to be in the range of ₹3,800-4,000 crore. “Typically, however, we have co-investments on top of that," said Unni.

In its previous fund, co-investments by limited partners contributed 18% in addition to the blind pool. “Our expectation is that this fund's size will be somewhere in the ₹4,500-5,000 crore range, including co-investments."

Limited partners are investors who pool in capital but are not involved in the management of a fund, unlike general partners, who manage the corpus.

The firm’s maiden fund, TVS Sriram Growth Fund (TVSGF) 1A, was launched in 2008 with a ₹585 crore corpus, while TVSGF 1B was sized at ₹586 crore. The third fund received commitments of ₹1,937 crore. So far, Fund IV has raised ₹3,564 crore.

TVS Capital Funds plans to make five to six investments in the enterprise technology sector from its fourth fund over the next four years. Overall, the new fund will have a total of 15 new investments with an average cheque size of ₹300 crore, according to Unni.

So far, the firm’s Fund IV has backed two companies: Finnable, a personal loan fintech startup; and Saarathi Finance & Credit, a non-banking financial company that provides credit solutions to small businesses across semi-urban and rural India. Finnable raised $27.4 million in a Series B round, led by Z47 with participation from TVS Capital and Stride Ventures in November last year. Saarathi Finance raised $41 million in May from the fund alongside Lok Capital, Paragon Partners and Evolvence Equity Partners.

Tech targets

TVS Capital is looking to back companies across categories, including cybersecurity services, cloud and AI infrastructure and enablers, and public markets-bound software companies flipping to India.

The firm views cybersecurity not just at the technology layer, but the full stack, where companies start with consulting to integrate their solutions with clients. Cybersecurity investments in India have risen as companies view it as a necessary expenditure amid growing concerns about the role of AI in hacking.

As companies flip domicile back to India ahead of public debuts, TVS Capital is targeting software startups that generate $50-60 million in annual recurring revenue and are looking to list in the country. “Given the kind of IPO support we're seeing from the Indian market, there is a lot of potential for US-domiciled companies to return to India. We can support them with Indian growth capital," Unni said.

Currently, the firm’s deal pipeline leans towards services as investors navigate uncertainty around how software will evolve amid AI disruption.

To identify enterprise technology and services targets, TVS Capital has established a tech advisory board comprising several former top executives of Infosys Ltd and Mindtree, along with Krishnakumar Natarajan, currently managing partner at business-to-business focused venture capital firm Mela Ventures. “We're at a stage where in specific areas we have the capability to build in India, but with market access that is global," Natarajan told Mint.

Exit-return balance

TVS Capital's new fund has a 12-year lifecycle since its first close last October—the firm’s longest to date.

TVS Capital’s first two funds, TVSGF 1A and TVSGF 1B, lasted for nine and 10 years, respectively. The lifecycle of Fund III is eight years from the final close, with the possibility to extend it by two years.

While the latest fund will fully deploy funds in the next four years, exit horizons may differ.

“We try to strike a balance in our investing," said Unni. “We make investments with a long-term (~8-9 year) horizon as well as those with a 4-5 year horizon or even shorter."

The exit horizon aims to balance the distributed paid-in capital (DPI)—a ratio that represents the capital returned to investors relative to their contribution—and internal rate of return (IRR). Higher numbers suggest that a fund has performed well, building trust with existing LPs and bringing in new ones.

The firm's second fund TSGF 1B, which fully exited investments in 2022, delivered a gross IRR of 27.4% and a net IRR between 15.6% and 17.6%, according to a blog post from TVS Capital in December last year. For context, according to AIF benchmarks from Crisil Intelligence, pooled IRR across 99 category II alternate investment funds stood at 11% in FY22.

“Ideally, we want to exit the fund in 10 years, making us one of the best long-term growth equity partners for a tech startup," Unni said.

Since its inception in 2007, TVS Capital has invested in 32 companies, including PhonePe, the corporate debt marketplace Yubi, Wonderla, the fashion and beauty retailer Nykaa, the National Stock Exchange, the listed power trading exchange Indian Energy Exchange, and TVS Supply Chain Solutions, among others.

Gopal Srinivasan is the current chairman and managing director of TVS Capital. He is a third-generation member of the TVS family, which owns the TVS Group, a multinational conglomerate with over 50 subsidiaries, including two-wheeler maker TVS Motor Co. Other partners at the private equity fund include former Emerald India director Praveen Sridharan, Gaurav Sekhri and Chandrasekar V.

TVS Capital last exited from Go Digit General Insurance in May 2024, when the company made its public market debut, closing the first day of trading at ₹305 per share. TVS Capital had invested ₹300 crore at ₹97 per share. Its other notable exits include Nykaa prior to its 2018 IPO, Five Star Finance and Leap India, which it sold to KKR in 2023 in a secondary transaction.