The availability of domestic capital could make the fundraising process for India-focused private equity (PE) and venture capital (VC) firms easier at a time when macroeconomic headwinds are prompting foreign limited partners (LPs) to pull their purse strings.
LPs pumped in $2.4 billion to PE and VC firms in the first four months of this year, which is almost a 30% drop from the corresponding period last year.
Although the exact breakup of foreign and domestic LPs could not be ascertained, experts say the share of local capital could be around 40% and growing. For certain Alternative Investment Funds (AIFs), this could be as high as 100%, but it could be much less for foreign PE funds focused on India.
“Domestic capital tends to be more resilient to global vagaries, and provides a diversified pool of capital to investment managers, enabling them to invest in a wide range of sectors and even support new industries,” Darius Pandole, managing director & CEO, PE & Equity AIFs at JM Financial, told DealStreetAsia.
“Traditionally the Indian VC-PE ecosystem has been predominantly funded by foreign capital but in the past decade or so, there has been a consistent increase in the volume and share of domestic capital in the country,” added Pandole.
Primary contributors of domestic capital are high net-worth individuals (HNIs), family offices, and institutions, but there is a huge pool of capital lying with insurance companies and pension funds which can be tapped further, experts say.
Going forward, the share of capital coming in from domestic LPs is expected to grow even more as household savings for HNIs move more towards financial assets from physical ones.
According to a report by 256 Network and Praxis Global Alliance India, investments from family offices in the country are expected to make up 30% of the total $100 billion of startup funding by 2025.
Among institutional LPs in the country, NIIF, SIDBI Fund of Funds (FoF), LIC, and SBICAP Ventures are either wholly or partly owned by the Government of India.
In the private space, Nippon India AMC’s AIF FoF, and HDFC Bank, among others, have been regularly investing in PE and VC funds hoping to land a windfall in the years to come.
Meanwhile, the most active family offices in India over the past few years have been Artha India Ventures, Kris Gopalakrishnan, and PremjiInvest, among others.
Growing home base
The frequency of shocks across the financial, political, and societal spectrum in the global market is such that PE and VC firms that are currently on the road to raising capital are increasingly tapping domestic LPs.
After all, opportunities in India seem to be rife, even when fears of a recession are looming large in developed markets, said Chirantan Patnaik, Director, Venture Capital (Technology and Telecoms Equity Group) at BII, which acts both as a fund LP and as a direct investor in startups.
“By and large if you look at the dynamics of domestic capital participation in the private asset class globally, there is a large ‘home base’ effect… Clearly, India is in an enviable spot — it has been surprisingly resilient despite multiple shocks,” he said.
Echoing similar sentiments, PR Srinivasan, founder and managing partner Xponentia Capital Partners, added: “There was a time when the volatility of foreign flows had an impact on Indian stock markets & the economy. Clearly, that is declining. Having a solid base of domestic LPs is a key strength for becoming a successful fund manager.”
Today, India is tracking similar developments that took place in China, where domestic capital has become as large, if not larger than, foreign capital in alternative assets.
According to a recent UN report, India’s economy is expected to grow by 6.7% in the calendar year 2024.
“The obvious advantage of channelizing domestic capital into alternative assets is that it allows domestic investors to reap the benefits of the extraordinary growth of the Indian economy and new business development driven by a large pool of committed entrepreneurs,” said JM Financial’s Pandole.
Boosting global investor sentiments
“Global investors often consider the level of domestic capital being invested as a key indicator of the strength and stability of the market,” said Rajat Tandon, President of the Indian Venture and Alternate Capital Association (IVCA). “One of the key advantages of having a strong domestic investor base is that it can enhance the confidence of global LPs who are looking to invest in the Indian market.
Over the past few years, there has been a significant increase in the number of new AIFs registered in India.
According to IVCA estimates, over 100 new AIFs have been registered every year since the AIF Law came into existence in fiscal 2018, with FY23 seeing a record high of over 200 new registrations.
“AIFs have been registered every year, with FY23 seeing a record high of over 200 new registrations. This trend is expected to continue, driven by the increasing demand for alternative investment options among both domestic and global investors,” said Tandon.
While LPs invested $3.4 billion into PE and VC firms in the first four months of last year, the figure stood at a whopping $10.5 billion at the end of 2022. In 2021 and 2020, PE and VC firms garnered $4.6 billion and $5.4 billion, respectively.
Among the top funds raised so far, Kotak Investment Advisors amassed $1.25 billion for its latest investment vehicle against a targeted corpus of $1.6 billion.
More recently, in May, Renuka Ramnath-led Multiples Alternate Asset Management made headlines for making the first close of its fourth fund at $640 million. It is eyeing a total of about $1 billion.
“Cultivating the domestic investor market has been an objective for us at Multiples. We are very happy to see the alternate asset product gaining attractiveness for domestic investors,” Renuka Ramnath, founder, MD & CEO at Multiples Alternate Asset Management, recently told DealStreetAsia in an interview.
In the VC space, Nexus Venture Partners and Iron Pillar raised $700 million and $129 million, respectively, to invest in the country’s burgeoning startup ecosystem.