While overall funding volumes have seen a slump, investments in private markets and startups have continued to outperform in terms of returns compared to public markets, a new report from credit rating company CRISIL venture capital fund investor Oister Global showed.
The report highlights that the aggregate benchmark of alternate investment funds (AIF) investing in private markets delivered an alpha of 13.5% over the public market equivalent, S&P BSE Sensex. Further, more than 75% of funds examined as a part of the report have generated a positive alpha.
In investing terms, alpha refers to excess returns earned on an investment above the benchmark return.
As part of the report, CRISIL analysed 217 funds (AIFs) belonging to vintages between fiscal years 2013 to 2022, and investing in private markets.
The report comes at a time when Indian technology startups recorded a steep fall in calendar year 2023, with new-age ventures raising a mere $7 billion in equity funding, marking a seven-year nadir for the sector.
“The performance of the private markets has been heartening. With AIFs coming in, the startup industry is still young (10-12 years old) compared to the US and still has consumed $100 billion in capital, which is 9% of India’s total capital requirement – showing the opportunity funds are seeing in the (new-age technology) space,” said Rohit Bhayana, cofounder of Oister Global told ET.
Bhayana expects that in spite of the so-called funding winter, investments in private technology companies will grow to $600 billion over the next five years.
“We see that of the $600 billion that will be consumed by Indian startups in the next five years, $100 billion will come from non-institutional investors and high-net worth individuals,” added Bhayana, who is also the cofounder and a managing partner at Lumis Partners.
Further, the report added that distribution-to-paid-in-capital (DPI) ratio, another metric closely tracked by venture funds, was higher for previous vintage funds, considering the duration of investments and bets made.
DPI refers to cumulative proceeds returned by a fund to its limited partners and investors, relative to the total money contributed to its paid-in capital to make investments.
As of March 2023, the pooled internal rate of return (IRR) of funds focused on early-stage investments (in private markets) was 39% and that on later-stage investments was 26%.
IRR is a metric constantly tracked by investment firms to estimate the profitability of potential investments, and alludes to a fund’s performance over time.
