India-focused funds see surge of domestic investors

Fat exits can make investors comfortable with the asset class

India-dedicated funds raised nearly two and a half times more money from domestic investors in 2015, after the activity dropping around 74 per cent a year ago. However, experts still believe domestic capital will take time to mature and get unlocked in India.

According to Venture Intelligence data, funds from domestic investors rose to $317 million in 2015 as against $130 million in 2014. It was $517 million in 2013. On the other hand, funds raised from foreign investors during the same period dropped to $2.34 billion, from $2.73 billion in 2014, the highest in the five years.

Abhishek Goenka, partner with PwC, however, says the surge is a welcome sign, but domestic capital will take time to mature and get unlocked in India. Today, a major chunk of the domestic capital comes from family offices, who understand entrepreneurship and risk. Again, it is the start-up boom that is leading the trend.

Investors in India need to get more comfortable with the asset class and that could come after more successful exits, he says. Till now, most domestic funds have only given muted returns. The other challenge is the limited number of managers for domestic funds.

Gopal Srinivasan, chairman and managing director, TVS Capital, is bullish on the environment of fundraising for India-dedicated funds. He, however, adds that the domestic capital will take some more time to mature, considering high net worth individuals (HNIs) are the primary source in India at present.

“But, changes can happen quicker than one can imagine, especially those that happen with a stroke of a pen. Take the pension regulator’s move to allocate two per cent of the public pension, for AIFs. This means Rs 800 crore per year.  Similarly, insurance contribution can go higher,” he says.

The asset class is young and seasoned track records are yet to be seen. HNIs as an asset class (excluding family offices) have strong reactions to ups and downs, which isn't ideal for a long-term asset class.

“Globally, around 40 per cent of AIFs comes from pensions, and another 20 per cent from charitable/university endowments. These are very long-term, patient LPs (limited partnerships) with strong institutionalised fund evaluation abilities. We will have to let these pools emerge,” he says. The vision of a pensioned society envisaged in the Union Budget will help create such capital pools.

Moreover, buyouts and growth are larger size funds.  VC and seed funds, being smaller corpuses, are easier to raise in a capital-constrained domestic market with their Rs 200-400 crore total fund size. This is also a risky development, as a concentration of investments into these small VC funds might result in volatile returns. “HNI LPs should not become disenchanted with these outcomes in the short-term,” says Srinivasan.