Exclusive: Temasek-owned InnoVen Capital eyes independent debt fund, change in structure 

Ashish Sharma, CEO, InnoVen Capital India

InnoVen Capital India plans to raise a fund independently to provide debt to startups, in an attempt to do more deals and simplify its structure during a record startup funding boom in India.

InnoVen India currently operates as a non-banking finance company (NBFC) and is co-owned by Singaporean giant Temasek and United Overseas Bank. The new plan, for which terms have still not been finalised, will see InnoVen registered at a Category 2 Alternative Investment (AIF), similar to its peers Alteria and Trifecta Capital, said sources, who did not want to be named.

InnoVen is looking to raise about $200 million for this fund, of which Temasek could invest more than half, while other large limited partners (LPs) — institutions and family offices — could fill the rest. The fund size has not been finalised yet and could change.

InnoVen India CEO Ashish Sharma declined to respond to detailed queries from Moneycontrol.

Charting an independent path

The new structure is also an attempt to chart an independent path and enjoy the independence and financial perks that venture capital asset managers enjoy, compared to a relatively rigid NBFC, said one person aware of the plans, requesting anonymity.

Temasek-owned InnoVen provides debt to startups in India, Southeast Asia and China. Its India portfolio includes fitness chain Cure.fit, online pharmacy PharmEasy, business-to-business firms OfBusiness, Infra.market and Zetwerk, and online learning firms Byju’s and Eruditus.

Venture debt firms typically take a small equity kicker in the companies they lend to. This equity can be valuable later on, and venture debt is largely dependent on the company paying back money from its cash flows and the equity capital it raises.

“They have been discussing this for over 18 months, and this fund should close in the next few months. In an NBFC, capital gets locked in, showing returns and recycling capital — investing the same money in newer companies is difficult. A separate, professionally managed fund is a much bigger opportunity,” said a person tracking the company.

“If they are able to raise money from external LPs, it will validate their brand and work in India. And I’m sure Temasek’s backing will help a few institutions come in,” the person added.

At venture capital and debt firms, investors make their money in two ways  — management fee and carry/carried interest. Management fee is akin to salaries, and includes the cost of running the firm, travel, administration and other things — about 1.5-2 percent of the total fund size. Individual senior investors can earn millions of dollars in management fees.

Carry, or the profits from an investment, typically make up the bulk of venture capital returns for investors. Converting from an NBFC to a fund could also help InnoVen’s leadership command better fees, and align its incentives closer to how an asset manager works, compared to a lender.

Alteria Capital, founded by two former InnoVen leaders, raised a Rs 1,750 crore (about $230 million) second fund earlier this year. Trifecta Capital also raised a Rs 1,025 crore ($140 million) fund earlier this year.