Secondary funds raise pace of startup investments

Bengaluru: Speciality secondary funds such as TR Capital and NewQuest Capital Partners are increasing their pace of investing in startups, as venture capital firms seek to generate long-overdue returns in the absence of initial public offerings (IPOs).

TR Capital and NewQuest have started buying shares in individual startups after discussions to purchase VC portfolios didn’t fructify, four people familiar with the matter said. TR Capital has appointed Norbert Fernandes, founder of startup investment firm IvyCap Ventures, as vice-president to hunt for startup deals, the people said.

TR and NewQuest are in talks to buy shares in Flipkart, Ola, Paytm, Swiggy, Freshdesk, Byju’s, Lenskart and others, the people cited above said, on condition of anonymity.

VC firms that have sold shares or are in the process of selling shares include IDG Ventures, Matrix Partners, Accel Partners, Blume Ventures and Norwest Partners, the people said.

If the proposed deals materialize, VCs will be able to show attractive returns on some large investments, potentially boosting deal volume in the startup ecosystem over the next two years.

VC firms are scrambling to sell stakes in old portfolio companies to specialist funds and asking for fund extensions, as they seek to prove that their bets on Indian startups will pay off after more than a decade of investing, Mint reported on 23 February.

“Portfolio sales are very complex and take a lot of time so secondary funds are now starting to buy shares in companies via secondary transactions. TR and NewQuest are the most aggressive of the lot,” one of the four people cited above said.

One benefit of buying shares in secondary deals is that the buyer sometimes gets a discounted price.

“Secondary funds have the advantage of buying at a discount because VCs are okay selling at a lower price because getting liquidity is so tough,” the second of the four people cited above said.

In the absence of IPOs and big-ticket acquisitions, secondary share sales have become the biggest source of exits for VCs in India.

Until now, Japan’s SoftBank Group has led the way in providing secondary exits to VCs in Flipkart, Ola and Paytm.

Following SoftBank’s lead, other large funds and investors are now striking such deals. The proposed investment by Walmart Inc., the world’s largest retailer, into Flipkart involves a large proportion of secondary share purchases.

Such secondary deals may help VCs change the perception among some limited partners—investment firms that put money into VCs—that the Indian market looks promising on paper but doesn’t return enough money.

TR Capital and NewQuest did not respond to emails seeking comment.livemint