Mumbai: Family offices and ultra-high net worth individuals (UHNIs) are among the limited partners (LPs) that are increasingly evaluating direct investment programmes along with fund managers to ensure better autonomy and potential for higher returns.
Traditionally, limited partners (LPs) commit capital to venture funds without knowledge of the specific investments the fund manager will make, known as blind pool investment. However, these co-investment programmes provide LPs with the freedom to choose startups they want to fund, and typically do not have any management fees attached to them.
Bhaskar Majumdar, cofounder and managing partner of Unicorn India Ventures, who has granted his LPs the right to commit a larger chunk for co-investment opportunities, said, “There is a pool of capital available in the international market, but these investors prefer not to set up operations in India or engage in blind pool investments through traditional VC structures.”
Instead, according to Majumdar, “they seek close collaboration with one or two trusted Indian funds. They believe that this approach offers larger potential rewards with lower risks because they enter at later stages and develop relationships with Indian funds who act as their partner in deal sourcing and portfolio management”.
In today’s tough fundraising environment, private equity funds like Cinven and Ardian have been offering fees-free co-investment programmes to their LPs, the Financial Times had reported in August.
The tightening of interest rates in the US has led to a slowdown in venture fund investments in India. Several startups have had to lay off staff, shut down, or raise capital at lower valuations. In this backdrop, LPs are increasingly looking to back proven winners with a strong track record, according to Vikram Chachra, co-founder and general partner of 8i Ventures, which backs consumer and fintech companies.
Backing Emerging Winners
“They want to invest alongside specialist funds. If they can clearly see a company emerging as a winner with low wipeout potential and a clear upside based on momentum and market leadership, that’s where these investment programmes come into play,” said Chachra, who has also been approached by his funds’ LPs to support their direct investment programmes. “Typically, these opportunities arise through portfolio managers.”
To be sure, large limited partners like sovereign wealth funds and institutional investors have been directly investing in the Indian tech ecosystem for some time. However, this time round, Indian family offices that have gained some experience investing through VCs are vying for direct opportunities.
A senior executive at an investment bank said that domestic family offices and HNIs are warming up to explore co-investments along with the funds they are in, but it is purely opportunistic.
“Larger families do take on co-invest rights with some VCs. It is good economics for them, as on the co-invest part, there isn’t a fee structure. However, such investors explore it opportunistically and mostly in later-stage companies which are easier to underwrite from a risk/reward standpoint and also where profitability is established and liquidity events like an IPO are not too far out,” he said.
In August, three family investment office funds collectively acquired a stake worth about ₹435 crore in IPO-bound online kids and baby product retailer FirstCry. One of the investors was Sharrp Ventures, Harsh Mariwala’s (Marico) investment office which also serves as an LP in venture funds. Rishabh Mariwala said such opportunities sometimes offer substantial financial rewards.
“You have the possibility of exiting sooner because the business scales, rather than waiting for the typical seven-year fund cycle,” he said.
Additionally, Nexus Venture Partner’s limited partner, StepStone, made its first direct investment in India in Zepto’s $200 million round.
In the past, some LPs have invested without collaborating with a venture fund. One such domestic LP, which backs premier Indian funds, said that about a year ago it had actively begun to invest directly. However, the valuation fluctuation and governance lapses at startups put them “on the back foot again”.
“We have gone back to being more of an allocator rather than a direct investor because, honestly, fund management is not something that we want to do at this point in time, considering the volatility in the ventures market,” the LP said. “So we’ll probably wait for things to settle down a bit.”
