Exclusive: Alteria Capital also eyes equity play with $155m venture debt fund

Vinod Murali, Managing Partner, Alteria Capital

Venture debt firm Alteria Capital, which recently received the approval of Securities and Exchange Board of India (SEBI) to launch its Rs 1,000 crore ($155 million) fund, is also looking at equity investments through the new fund.

Alteria Capital was floated earlier this year by two former senior executives at Temasek-backed InnoVen Capital – former group COO and India CEO Ajay Hattangdi and former deputy CEO Vinod Murali.

Alteria is aiming to garner half of the targeted amount for its first close by the end of March 2018.

The fund has been registered with SEBI as a category II alternative investment fund (AIF) which opens up the opportunity for equity investments also, Vinod Murali, Managing Partner, Alteria Capital told DEALSTREETASIA in an interview. Edited Excerpts:

What led you to launch a new fund?

There are multiple drivers. First, from a regulatory perspective, the AIF (Alternative Investment Fund) has opened up to foreign investments. So there is finally a vehicle in India to provide debt as well as have a quasi-equity component and take investments from domestic and offshore investors. There was no other construct before which allowed for both of these variables to be taken care of. The earlier construct I was in (Innoven) was an NBFC, which is good for debt but not good for hybrid instruments. Similarly, a fund is good for equity, but AIF was restricted to domestic investors.

Second, when you’re amidst entrepreneurs, the bug bites you. So, for both of us, it seemed like a good opportunity to spread our wings and create our own future. The venture debt asset class, for the same reason that I explained earlier, has also come into a good zone, is well understood and appreciated. Given the track record that we had — and we had worked together for so long — plus the asset class coming nicely together, and the regulatory construct allowing for this kind of vehicle taking domestic and offshore investments, we decided the time was right to do something like this.

You will start deploying at a time when VCs will also be armed with a lot of dry powder. When you start deploying in 2018, do you expect the market to be more competitive or easier?

I think for equity investments, while the numbers have been slightly lower than before, good companies are still getting capital, and overall the value of investments has actually been increasing. So, as a market, there has been steady-to-positive growth in terms of venture equity investments. The second thing is that when equity investors take more time, it’s actually a good thing for us because it means that the bar is higher for investments, companies are put through the grinder and there is a higher quality of output. Since our target is largely venture-backed companies, the selection of companies for us is of much better quality. Compared to five-six years ago, there is a lot more seriousness around entrepreneurship. It’s no longer something that is done on a lark. It’s not easy.

On the other side, there is also a good ecosystem which is still developing but we are definitely in a good place now where there are multiple levers of support for founders. There is a lot of learning that the ecosystem has gained, similar to venture debt. The whole venture-backed entrepreneurship wave is about 10 years old, and on the way, we’ve seen some ups and downs. In the long term, there is no doubt that India is going to be a significant venture ecosystem. The drivers for that and the kind of businesses that succeed, those can keep changing over time.

Essentially, there is a high level of certainty that we are going to be an important player in the global construct. A lot of ancillary industries have come up feeding off the e-commerce wave. We are seeing more entrants coming into the micro-economies outside the metros. There is definitely a market for deploying capital. It is, however, a tough task for entrepreneurs to raise funds, because capital should never be easy but for the appropriate situations, the right amount of capital is available.

Would you also do some equity investments?

If you look at the global venture debt model, it succeeded on a couple of points. They play the debt part of the business very safely, and we’ve shown that in the past with very low loss rates. Second, where you identify winners, you try and follow up with small slivers of equity for follow-on investments into an existing portfolio. In India, we have a situation where if we look at the Series A and Series B market, there are a lot of investors who are keen to provide capital. Series C is a tough spot. There are many times when there is a lead investor and there are small gaps in the round because $25-30 million cheques are not easy to come about for non-profitable companies, they are still not ready for private equity. So there is a possibility for us to do very small cheques, more as a filler for the round only for portfolio companies where we are comfortable with their progress and what they are doing. So, there will be small equity cheques but the core focus will be venture debt.

How do you plan to deploy your new fund?

It’s a Rs 1000-crore fund, and we will look to deploy this fund anywhere between 6-8 quarters after we start. That’s the kind of visibility we have. The fund tenure that we have is a seven-year fund. So, the investors can see returns from the start and from year five, we will return all capital to the investors, at which point we hope to raise our second fund.

What is the average cheque size that you are looking to cut?

That’s another area where we’ve seen some significant learning. When we started venture debt, it was more Rs 5-10 crore cheque sizes. Now we feel there are some companies that can absorb even up to Rs 90-100 crore. So the range will be Rs 2-3 crore on the lower side up to Rs 100 crore on the higher side, but the median deal sizes will be around Rs 15-20 crore. It will be a wide range because we are seeing some larger companies which struggle to get conventional debt and there is no reason why we can’t fund those companies that are interesting businesses.

Are there any sectors that you are more keen on, or think they have more absorption power for venture debt?

Venture debt is not a pure sector-focused play. Overall, we like technology, consumer and healthcare. One year, we could go heavy on consumer, education and food, and the next year we could be heavy on SaaS and B2B marketplaces. The reason for this is that venture debt thrives on the basis of equity interest. So, it is important for us to understand what the broader investment sentiment is and be essentially aware of what is happening. However, there are some sectors which will be interesting. Like I said, there is a huge opportunity outside the metros and across product categories, that’s an area which will be interesting to a lot of investors. Also, in areas like education and healthcare, there is a lot that needs to be tapped. These are all areas which I think will grow. Not just fintech but broader financial services is another area that is interesting. The whole SME play with B2B marketplaces and the feeder network for SMEs is going to be an interesting area as well.

After your experience with an overseas investor like InnoVen, would you also be interested in overseas investments with Alteria?

This will be purely India-focused. There is a large opportunity here for us to deploy. Overall, we will be looking to deploy over Rs 2,000 crore in four years and there is enough opportunity in India for that.

Are LPs more receptive to a venture debt fund like yours?

Absolutely yes. For the launch of Alteria, a few things really worked in our favour, one of which was demonetisation when a lot of money got pulled out of gold and real estate and went into financial markets. It kept going into equity markets for a bit and those are expensive. A lot of investors in India, especially large family offices, are having a situation where on the one side, your fixed-income yields are very poor and on the other, you don’t want to be overweight on equities anymore. So where do you deploy? They are all working out ways to find alternative high-yield assets to put their funds into, but they want situations where it is relatively safe, gives reasonably good returns and they have people who have a good track record. And we fit the bill, so that’s working in our favour significantly.

There is a huge amount of liquidity in the domestic market. And we definitely hope to tap into that. This is both family offices and institutions. We see interest from insurance companies and banks. The reason for this is that with our fund, you don’t have to wait 8-10 years to know whether it’s working or not. We are returning all yield income from the first quarter itself. We are showing performance from the start. And there is cash flow for the investors from the start, which a lot of the domestic investors like. And on top of that, you get to enjoy some cream with the equity position that we have. So, you get the best of both worlds — you have your safe, predictable returns and a booster through the equity which is also available.

Also Read:

India: Alteria Capital gets Sebi nod for $155m fund; eyes first close by March

India: Former InnoVen executives float new $155m fund Alteria Capital