Venture debt funds see increasing interest from insurance firms, HNIs

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Mumbai: Insurance companies and wealthy individuals are increasingly interested in investing in venture debt funds thanks to their fixed income nature and track record, say fund managers.

The past few months have seen many venture debt deals and the launch of several venture debt funds.

According to private capital tracker Venture Intelligence, venture debt deals witnessed a significant uptrend in 2017, with 30 deals worth $81 million being closed as compared to $40 million across 31 deals in 2016.

“A lot of people have become knowledgeable about venture debt and are seeing it as a fixed income yielding product. Venture debt provides a safe way to get double-digit post tax returns and that is one of the fundamental reasons why insurance companies and family offices are resonating with it,” said Ajay Hattangdi, managing partner, Alteria Capital Advisors LLP.

Venture debt has shown a track record of good returns, said Hattangdi, adding there is regular repayment of principal and interest for the investor unlike in the case of venture capital.

Alteria is a Securities and Exchange Board of India (Sebi) registered category-II Alternative Investment Fund (AIF) venture debt fund based in Mumbai. It is currently raising Rs1,000 crore for its debut fund.

Traditional debt financing (i.e. loans from banks, non-banking financial institutions and other institutional lending platforms) is typically not available for early stage start-ups, given tough conditions required to be fulfilled by entities borrowing from such platforms. Here, venture debt has an advantage.

With evolving regulations over the last couple of years, more institutional investors such as insurance firms are allowed to invest in alternative asset classes and these investors have shown a strong interest in venture debt, according to Rahul Khanna, co-founder and managing partner, Trifecta Capital, a venture debt firm.

“Traditionally, the sources of institutional financing for AIFs were largely Life Insurance Corp. of India and Small Industries Development Bank of India. Institutions like insurance companies had limited access to alternative investing as the regulations did not allow them to invest into AIFs till a few years ago. Over the last three years, we’ve had the opportunity to work with many of these large institutions to build a framework for how venture debt fits into their treasury allocations,” said Khanna.

Trifecta was founded by Khanna and Nilesh Kothari. Before starting Trifecta, Kothari was managing director of ventures and acquisitions at technology consulting firm Accenture Plc, while Khanna was part of the India team of US venture capital firm Canaan Partners.

Trifecta has 13 insurance companies and several family offices as investors in its debut fund, he said.

Attributes such as regular payments and predictable returns have made the asset class a good fit for these institutional investors.

“The Trifecta Venture Debt Fund offers quarterly income distribution along with an equity kicker that provides fairly predictable returns. Some of the finer aspects of the fund structure include a shorter fund life, recycling of capital and a fee structure that is completely aligned with the investor’s interest,” said Khanna.livemint