In an unusual move, venture capital fund Peak XV Partners has reduced the size of its $2.85 billion fund by 16 percent or $465 million, as it looks to deploy capital more judiciously and return uninvested monies to its sponsors or limited partners (LPs), amid a buoyant public market and its rub-off effect on private market valuations.
Along with a reduction in fund size, Peak XV has also tweaked its payout for its fund managers or general partners, wherein it will now have a 2/20 compensation structure, with a provision to catch-up on carry to 30 percent, in a move that will bring the investor on par with its industry peers. To be sure, the change in compensation structure is only for growth and multistage funds. There will be no change in Peak XV's Seed and Venture funds' payout structure.
The investor earlier had a 2.5/30 compensation structure where 2.5 percent was the annual management fee paid to fund managers for managing assets and 30 percent was the performance fee or carry.
Carry, short for carried interest, is the share of profit that fund managers earn from investments they make on behalf of investors. It is paid out only after achieving a predefined level of profits.
These changes were communicated in a letter that Peak XV sent to its limited partners (LPs) on October 2, 2024. Limited partners (LPs) is a term used to refer to institutions or individuals who invest in venture capital funds.
Moneycontrol has seen the letter.
Peak XV, one of the largest India-focussed funds, informed its LPs that it decided to voluntarily resize its 2022 fund as Indian public markets have re-rated up and mid-cap P/E multiples have expanded significantly in the last year. This has in turn resulted in high valuations in late stage growth and pre IPO companies.
“In such an environment, we are choosing to remain disciplined and will continue to invest cautiously,” the letter said.
Peak XV, in a prepared statement, later confirmed the developments.
"While this may be contrarian to market exuberance, this will serve our founders and LPs well in the long term. These changes have been very well received..." the investor said.
"We fully appreciate what a strong and well aligned partner Peak XV is. They've always done what is right - finding great entrepreneurs, helping them build thriving companies, and generating strong returns for investors. This reinforces for us that Peak XV remains a top investor and long-term partner," one of Peak XV's LP said.
F&O frenzy driving markets
The move comes in the backdrop of an exuberant public market in India, which is manifesting itself in the private markets valuations.
India’s F&O (futures and options) market has seen an explosive growth in volumes post Covid-19, though a vast majority of individual traders are on the losing side, per data from the market regulator.
The current public markets euphoria in India is akin to what the private markets experienced in 2021, when India minted a record 45 unicorns, or startups valued at or over a billion dollars, in a span of 12 months.
As a result, the valuation expectation has gone up for many startup founders, who are now benchmarking themselves against their much better valued listed peers.
A few are also opting to ditch venture money and going for a public listing instead, as they are confident of snagging better valuations.
Amid this push and pull, Peak XV has been a reluctant buyer but an active seller, and has clocked $1 billion in exits since its split from Sequoia Capital last year. 15 of its portfolio companies have gone public in the last four years.
Peak XV (formerly called Sequoia Capital India), had raised a record $2.85 billion in its largest-ever fund to back new-age companies in India and Southeast Asia in 2022.
Since then, it has backed several companies across sectors and deployed hundreds of millions of dollars and still has over $2 billion in dry powder which will now be reduced after the latest move.
“The market right now is a great one to sell and not a very favourable one to buy. The two cannot co-exist. Peak XV, over the past months, has generated great returns which gave it confidence to reduce the total fund size,” a person in the know told Moneycontrol.
Peak XV is sitting on over $10 billion in realised and unrealised profits on investments made since inception around 17 years ago.
“Since 2021, there have been 15 companies that have gone public from our portfolio. In fact, after the rebrand to Peak XV (from Sequoia Capital India) last year, we have achieved around $1 billion in exits and 2024 is already our second best year (after 2021) in terms of distributions. We are fortunate to have a meaningful backlog of exits and distributions lined up for the upcoming quarters,” Peak XV said in its letter to LPs.
Indigo paints ($185 million), Honasa Consumer ($73 million), Truecaller ($40 million), Five Star Finance ($150 million) are some of its most notable public market exits in the recent months.
Healthkart, Rebel Foods, Finova Capital, PingSafe, Cloudnine are among its other private market bets, where it has made good returns.
Precedents
Examples of funds deciding not to draw down capital fully are far and few. The last India-focussed fund to do so was ChrysCapital, when it decided to cut its fund size by $300 million from the $1.25 billion it closed in 2010, as it found limited opportunities to invest then.
Globally, Index Ventures and Sequoia Capital have also reduced their fund sizes in the past.
An industry source said Peak XV’s move to cut fund size and reduce carry was a positive move, adding that the nudge may have come from LPs. “There would have been LP expectation for a good chunk of capital to be returned as it wasn’t being deployed. It (reducing fund size) is a good thing reputation wise,” this person said.
Reduced carry for growth and multistage funds
Along with a reduction in total fund, Peak XV also informed its LPs that it is tweaking its fee structure.
“We’ve also decided to make some part of our carried interest linked to distribution of profits in our growth and multi-stage funds. Our new economic structure will have a baseline of 2% fees and 20% carry. After achieving 3x distributions to paid-in (DPI), these funds will have provisions to catch-up on carried interest up to 30%. These changes will apply to three growth funds and four multi-stage funds. Our seed and venture fund economics remain unchanged,” the investor said in the same letter to its LPs.
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