'Investors expect pre-tax returns of 17-18% from venture debt'

In a Q&A, Ajay Hattangdi shares his plans and prospects for venture debt in India

Ajay Hattangdi and Vinod Murali, former executives at venture debt firm InnoVen Capital, are planning to launch their own venture debt firm Alteria Capital. Ajay Hattangdi, in an interview with Ranju Sarkar, shares his plans and prospects for venture debt in India.

What’s the concept (of your fund)?

We are doing a venture debt fund, but in a fund concept. We have named the business Arteria Capital. Idea is to run this business as an independent fund with external Limited Partners commitment. We are looking to raise $125 million fund, with a $30 million as the green shoe. We will raise money from both offshore and domestic investors. The fund needs to be registered with Sebi — by mid-September, we should go out for fund-raising.

  

What kind of returns do LPs expect from venture debt?

They expect pre-tax returns of 17-18 per cent and gross portfolio returns of 20 per cent from venture debt companies. We would have a four year investment period and we would start returning capital from year fifth year onwards. By year six or seven, we should have all the capital returned to the investors. The beauty of this product is that since it generates a current income throughout the life of the asset, it distributes interest and fees right from the first quarter after deployment. Investors get returns throughout the life of the fund as opposed to an equity fund where the returns are back-ended.

How keen are LPs to invest in venture debt? 

In many matured markets, venture debt accounts for 15 per cent of the venture debt market. In India, that number is 3-4 per cent. As venture capital grows in India, venture debt will also grow, and probably grow faster than venture capital as it has lot of headroom for growth. 

Globally, the largest player is Silicon Valley Bank for whom I had helped set up the India business in 2007. Three other large players are Triple Point, WTI, and Hercules Capital. SVB had two arms in India: SVP India Capital, the venture capital arm, and SVP India Finance, the debt arm that became Innoven Capital in 2015.  SVP India Capital spun out, and created a new fund Saama Capital. 

Why was SVP India Finance sold to Temasek?

That was also because of capital constraints at Silicon Valley Bank end; it had nothing to do with the India business. Till 2015, we were the only providers of venture debt in India. They ran into some capital constraints that prevented them from investing more capital into our business at a time when we needed it. We had no choice at that time except to go out and find a buyer who would be ready to pump in more capital into the business.

Was India no longer a focus market?

It was about capital constraints. The bank had certain amount of finite capital to put in step-down subsidiaries around the world. As China came up and Europe plans fructified, they needed to put more money to work in these various markets. They could not put in more money than what they had committed — they had already invested $50 million which is quite large. Therefore they were not able to pump more money.

Did they manage to recover the money?

Yes, they were bought by Temasek and UOB Bank, a Singapore-based bank. It was sold for Rs 300 crore, which was equivalent to $50 million. In effect, they recovered more as they put in Rs 225 crore and recovered Rs 300 crore, but because of rupee-dollar depreciation, it looked flat.  

What is the opportunity in India?

Venture debt accounts for 15 per cent of the venture capital market in matured markets like the US and in India it is only 3-4 per cent. If 3-4 per cent goes to 15 per cent, the opportunity is going to be much larger. Two, as venture capital grows, it increases the size of venture debt market in India. You have got two strong growth drivers. 

But four per cent may not grow to 15 per cent in India? 

Certainly, it may not. Four per cent can grow to eight per cent, which is doubling of the market. 

Four per cent can grow to seven per cent, which is 70-80 per cent growth. I see no reason why it won’t grow. 

Venture debt is far more efficient and less dilutive for the promoters and the VCs than taking equity. The benefits of venture debt are as true in India as they are in the US.