We saw zero losses through two waves of Covid: Alteria's Vinod Murali

Alteria Capital is on track to commit over $200 mn of venture debt this year

Alteria Capital, a venture debt firm that raised its second fund in October from domestic LPs and counts companies like Rebel Foods, BharatPe, Infra.mart, Dunzo, Mensa Brands, Spinny as portfolio companies. Alteria’s managing partner Vinod Murali in an interview with Deepsekhar Choudhury talks about returns from the first fund, Alteria's evolving investment thesis, how unicorns are impacting the venture debt game, and more.

Alteria raised its first venture debt fund of Rs 1,000 crore in 2018 and now you have closed your second fund at Rs 1,800 crore. What has changed between then and now?

In 2018, it was unimaginable to raise $50 million for a venture debt focused fund. And it was difficult to raise even venture equity funds from domestic investors without the backing of a global institutional global brand at that point of time. When we raised the first fund of Rs 1,000 crore in 2018, the questions from investors were around asset class quality, will we lose money, will start-ups be successful, what will the returns be and so on. When we went out to raise our second fund in December 2020, we could say that things have played out as expected. Also, from a macro perspective, there is hardly any other fixed income asset class today that can give similar returns.

Another thing that has changed with the second fund is our ability to sign large cheque. We still prefer to invest in $500,000- $1 million segment in venture equity-backed companies, a larger fund size means that we can also do $20-25 million cheque in large companies that have already raised $100 million round.

What are the returns that your fund has generated for limited partners (LPs)?

First thing to note is that we deployed Rs 1,600 crore from our first fund, which was of Rs 1,000 crore, because we could recycle the principal amount. We have been distributing interest income for the last 15 quarters and have also started returning the principal to our investors, on which we are effectively six months ahead of schedule despite losing five months to Covid.

What our investors liked was that they were getting consistent incomes every quarter, where we are tracking 3-3.5 per cent every quarter. So the idea for them is that this is a fund which will effectively give them 17- 18 per cent, pre-tax and after all expenses. Also, we had zero losses through two waves of Covid and we didn't have to defer any income throughout the pandemic.

Venture debt funds invest in revenue generating companies. Why did you invest in Mensa Brands so early on?

That is generally the case as venture debt is a lower risk, lower return product. But the unique factor in the case of Mensa was that the usage of debt was not for burning the cash to fund growth. It was to acquire smaller brands which are not only revenue generating, but also EBITDA profitable. That is why we made a commitment of $20 million to Mensa through two rounds of financing. 

The number of venture debt deals spiked just after the first wave of the pandemic when venture equity funds turned away startups. What is your reading?

I don’t agree that venture debt is something you opt for when you don’t get access to equity funding. Because if you don't get access to equity, your business is at a very high risk and I don't want to fund you either. Our reason for high deployment is the fact that the larger and higher quality companies have realised that their equity is much more valuable than what they thought last year.

This year, when VC funding has been the highest ever in the country, Alteria is on track to commit over $200 million of venture debt. We've been funding cheque sizes ranging from Rs 2 crore to Rs 200 crore. And the companies who get Rs 100 crore from us, in turn raise equity rounds amounting to $100 million. They still take the debt for different purposes like working capital, capex or specific projects. 

Although you do debt financing, the deals are also structured in a way that you can also take an equity option. How big is that upside?

Our primary compensation is in the form of a coupon with an interest rate that companies pay every month. Also, then there's some fee included in the cash component. Although there is a bit of an equity upside, too, it turns out to be much cheaper for companies compared to a pure equity round.

We have already done some secondary transactions to benefit from the equity upside at Alteria this year. Also, we don't need a complete buyout -- even larger rounds give us some secondary results. The returns from this might be as big as 20x or 30x, but the case always is that the promoters and investors make significantly better returns on those companies. 

Byju’s is reportedly raising $500 million of debt and Oyo said it was going to raise $660 million in debt. Do you see venture debt funds in India being able to service those ticket sizes any time soon?

Let me tell you I was the one to fund Byju’s with rupee debt a few years ago, when the market was very different. The thing is most Indian startups have raised debt in the country, apart from a few instances like Oyo or SaaS (software-as-a-service) companies which have customers abroad and hence can raise money at a discount there.

The pool size needs to be at least $1 billion in size to provide a $100 million cheque so that a concentration risk is avoided. I think we need another 3-5 years before the current cheque sizes substantially scale up. There will definitely be an expansion and we have to grow, learn and then grow again.