Indian investors have welcomed the Government's move to allow private pension funds to invest up to 5 percent of their corpus in venture capital funds and SME funds, as they believe this will widen the pool of capital available to them and lead to more funds being raised from the domestic market.
The Finance Ministry, in a circular on March 17th, 2021, allowed privately managed provident, superannuation, and gratuity funds to invest up to 5 percent of their corpus in alternative investment funds (AIFs) such as SME funds, venture capital funds, social venture capital funds, and infrastructure funds. This will however only be allowed in AIFs with a corpus of at least Rs 100 crore.
"This is a very good move on two counts. There will be more sources of capital such as a pension fund or retirement funds. These are sources of long-term capital aligned to the investment horizons of venture capital investors. Very few have a 10-year horizon, so this will be very helpful and opens up a new pool of capital. The net IRR that a successful VC fund generates is 20-25 percent, so it is positive for these funds from a return perspective compared to debt or public market", TCM Sundaram, founder and managing director of Chiratae Ventures told Moneycontrol.
"It's a great move. A huge source of capital opens up for VCs. Many conglomerates have hundreds of crores in provident fund and gratuity each year. Even a small percentage of this deployed in VC funds serves is very helpful," said Anil Joshi, managing partner, Unicorn India Ventures, an early-stage fund.
While conglomerates have sometimes stayed away from AIF investing because it is relatively risky, investing smaller amounts could make sense. Another important use case is if a company wants to invest a fund operating in the company's sector of expertise.
"So a large consumer conglomerate can invest part of its provident fund corpus in a consumer brand-focused VC fund. An IT company can invest in a SaaS/IoT-focused fund. Domestic capital formation is critical and this a good long-term step in that direction, " Joshi added.
This will also give a thrust to local capital formation and wealth creation, as it will provide funds with an additional source of domestic capital when they raise money.
"AIFs need long-term money like pension and insurance. Pension and endowment funds are very active in countries such as US, Netherlands, Canada, and Norway. The move will allow pension funds managed by large Indian conglomerates to invest a portion of their corpus in AIFs," TVS Capital chairman and managing director Gopal Srinivasan said. TVS Capital recently closed a rupee-only capital fund from high net worth individuals, family offices and domestic financial institutions, with a total asset under management of Rs 2,000 crore.
Siddharth Pai of 3one4 Capital said the move was a long-standing demand from the industry and is an indicator that the Government may open up more sources of domestic capital. "There is a significant dearth of Indian institutional capital and this will help bridge that. Private universities have endowment funds but they are not allowed to invest in AIFs currently. This is an indication of the Government's intent to free up more domestic capital."
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