Why Indian family offices are pouring more and more money into VC funds

Indian venture capital (VC) companies are mainly backed by international offices for many years. However, today, the tables have turned. VC firms are seeing a significant amount of capital coming from Indian family offices in their latest funds.. The second-generation entrepreneurs of these offices became more active as limited partners (LPs). A case in point is Bloom Ventures, which recently closed its largest Indian fund at $250 million. The firm told us in an exclusive interview that 40 percent of its capital this time comes from Indian LPs.

“This time, we had an unexpected result, a slightly different theme, where Indian money came in a big way. With a lot more confidence and a lot more gum,” said Karthik Reddy, Managing Partner at Blume Venture Advisors.

K Capital has a similar story. The firm, which recently closed its third fund to invest in the healthcare, financial services, consumer products, commercial products and services sectors, has seen 50 percent of its funds coming in from Indian family offices. According to Sasha Mirchandani, founder and managing director of Kai Capital, India has not only seen a significant change and a large amount of money coming into India from the last quarter to the current period, but these investors are also more active.

“They ask the right questions, they get up to speed and they understand the property sector better than before. Today, it’s mostly the second generation that runs these family offices. They’re very competent and they put big checks into our coffers,” Sasha said. In addition, it is very certain that more money will flow if the company shows results.

Indian family offices and ultra-high-net-worth individuals (UHNIs) have become the ‘top source of domestic capital in the VC ecosystem’. They will account for nearly 60% of domestic capital raised by 2021, says Innov Capital’s sixth edition of ‘Primary Investment Insights Report – India’.

Ganesh Rengaswamy, Co-Founder and Managing Partner, Quona Capital agrees that Indian family offices are one of the fastest growing investor categories in venture funds. Quona is a global emerging market fund investing in fintech and fixed finance in 15 countries. “Unfortunately, we have not yet been able to benefit from the strong demand from Indian family offices due to their limitations in investing in international funds,” Rengaswamy said. However, the organization is looking for solutions to unlock that demand.

According to media reports, India has more than 250 family offices, each with average assets under management of more than $100 million. This includes the likes of Ratan Tata, Pawan Munjal, Gautam Adani, Azim Premji and others.

Reasons leading to this trend

The creation and evolution of Indian family offices are recent events. His key takeaways are the evolution of India’s startup ecosystem and venture capital industry, startup stories making international media headlines and startups touching unicorn and IPO milestones, among others. This has led to increased interest in funds.

“There are several case studies of venture funds that have been successful in generating high returns for their specific partners. Impressive risk-adjusted returns, experienced fund managers, the maturity of the startup ecosystem in India and the precedent of venture-backed companies are making the IPO sector attractive to Indian family offices,” says Indian Angel Network. Managing Partner Vinod Kenny said. The firm’s last fund had a limited mix of partners. Institutions, family offices and UHNIs participated as limited partners. A significant proportion of capital commitments were from family offices, including small and first-time family office investors.

Kenny feels that Indian family offices have realized that Indian fund managers can actively manage investments and portfolios better than a family office that lacks the necessary experience to manage these investments. “Depending on the bias and the risk, in the venture capital sector, there are several sub-assets that offer attractive returns, such as venture debt, micro VC, distressed and scale-up, which is prompting Indian family offices to allocate large shares to this asset segment,” Kenny said. .

Another key issue is India’s growing economy. This has led to the expansion of wealth and a significant increase in the number of millionaires, centimillionaires and billionaires in the world. These UHNIs are now looking beyond traditional wealth creation such as public markets, real estate and gold and investing in Indian startups through the VC fund pipeline.

“There is an increase in new wealth. Second and third generation families have a greater appetite and are more open to such investments. Also, there have been new family offices owned by technology founders. These founders have a strong understanding of this asset class and are deep in the ecosystem. Relationships make them better placed to invest in venture capital,” said Sumegh Bhatia, CEO and MD, Lighthouse Canton, India.

The firm’s last fund was the LC Nueva Alternative Investment Fund, which was raised through the partnership entity LC Nueva Investment Partners and focused on investing in pre-Series A and Series A deals in India. The fund has grown to around $45 million with support from international investors and several family offices. 40 percent of this capital comes from Indian family offices.

Alternative assets such as VC funds also serve as good diversifiers for the overall investment portfolio of these offices due to the low volatility and uncorrelated nature of these investments compared to traditional asset classes. “Sequential plays are a common strategy to focus on because the key objective of many is always to preserve capital. Lately, we’ve started to see more families separating part of their portfolios to invest in early-stage or growth. High-return-stage ecosystems,” Bhatia added.

Also, unlike in the past, Indian business houses have organized their family offices and investment approach. “They do this by recruiting professionals who manage these offices or by seeking professional help through wealth management firms to advise them on investments, risks, diversification etc. Furthermore, a progressive regulatory framework has reduced the friction and made it difficult to invest in alternative assets, especially Alternative Investment Funds (AIFs).” said Kapel Guptaa, Director – Finance, MegaDelta Capital.

Additionally, being an LP in different funds gives them access to high-quality deals with co-investment rights, thereby helping them discover new business models and opportunities around the world. “Many are using this opportunity to improve their investment decisions and space knowledge by continuously interacting with fund managers on their investment theories, new trends and technologies,” said Bhatia.

The effect

While it’s a win-win for both Indian family offices and VC firms, how it benefits startups in the country is an important question. Will this active involvement of Indian family offices prompt companies to write bigger checks to Indian startups? “I can’t say that I haven’t pooled my capital here because almost 40 percent of the fund is Indian money,” Reddy said.

“This will lead to more venture funds being started by fund managers, more experienced fund managers starting their own funds, and also big funds giving big money to Indian startups,” added Kenny.

In addition, many Indian family offices write checks to VC funds, which can lead to large sums of money, allowing them to invest at different levels. “For example, an early-stage VC fund can participate in a later stage round to ensure that the returns from the ‘winner’ are truly superior. Indian funds can extend funding to their ‘winners’ on the way to maturity and eventual exit,” Gupta said.

Gupta feels that as the startup finance ecosystem matures and the capital needs of Indian startups increase, coupled with some concerns around global capital (mainly the US – the largest share of startup funding), there are many opportunities to divert more Indian capital. Indian startups. “This could result in high returns for currently engaged Indian capital as the global economic situation stabilizes, offering good exit opportunities for foreign capital looking at deals in India,” he said.

As they mature, these family offices may take a hybrid approach of investing in indirect startups, that is, through funds and also directly investing capital in startups based on their potential and risk profile. “While many family offices realize strong returns from venture investments, they are constantly looking for more strategic ways to allocate capital and an interaction with such funds provides them with that opportunity,” said Bhatia.

Overall, investors are confident that more households will be open to exploring alternative asset classes such as venture capital or venture debt in the coming years.

Soumya Duggal with inputs