Banks develop a taste for venture capital after Sidbi backed new VC firms

Raising a new fund from domestic investors has never been easier. Institutional investors — led by banks, insurance firms, family offices and Small Industries Development Bank of India (Sidbi) — are backing new venture capital and venture debt funds.

If 2017 saw many new venture capital (VC) funds backed by the government’s Fund of Funds for Start-ups being managed by Sidbi, 2018 is seeing a flurry of venture debt funds, backed by banks, insurance firms and family offices.

“Banks are investing in funds and it’s a big thing,” says Ajay Hattangdi, former head of India’s largest venture debt provider Innoven Capital. There’s a lot of interest from banks to invest venture capital, he says. “They can’t lend to start-ups, which calls for a different credit appraisal and approach versus lending to SMEs. A start-up is not a shrunk version of a large company but fundamentally a different company. Investing in funds is a smarter way for banks to fund them through debt or equity. They can also benefit by cross-selling other products.”

Alteria Capital, the venture debt fund floated by Hattangdi and his former colleague Vinod Murali, has roped in a public sector bank and a private bank. It is set to announce the first close of its maiden Rs 10 billion fund.

Ninety per cent of Trifecta Capital’s Rs 5 billion fund was institutional money, which included three banks, 13 insurance firms, 2 development finance institutions and 5-6 Indian family offices. Ratnakar Bank was an early backer of Trifecta and is believed to have invested Rs 1 billion.

A Reserve Bank of India directive in September brought more clarity. Banks are allowed to invest up to 10 per cent of the paid-up or unit capital in Category-I or Category-II Alternative Investment Funds (AIFs). Category-II AIFs include private equity and venture debt funds. It had earlier allowed banks to invest in Category-I AIFs, which include venture capital funds and social venture funds. Banks are allowed to invest 5 per cent of their incremental demand and time liabilities after meeting statutory requirements, says a fund manager.

Venture debt targets 10-12 per cent post-tax returns for investors. Venture debt firms also distribute the quarterly income they earn from investee firms, generating a regular income for investors. “With yields of fixed-income instruments declining and equities being volatile, investment officers at insurance firms are looking to diversify and betting on alternatives,” says a fund manager. Trifecta Capital is now planning to raise a second fund after deploying $3.5 billion of its maiden fund and generating returns. Four other firms (Unicorn Ventures, IvyCap Ventures, Anicut Capital and Intelligrow) are raising venture debt funds and also targeting banks, insurance firms and family offices.

According to recent report by research firm Preqin, banks and corporate investors account for 20 per cent each of the funds mobilised by PE/VC firms. Last few years saw several VC firms, such as Stellaris Ventures, Pravega Ventures, Endiya Partners, and Fireside Ventures, raising their maiden funds from domestic investors led by family offices and Sidbi. Maiden funds target local investors as foreign investors look for track record.