Govt offers stimulus to SIDBI-backed PE-VC funds, gives fillip to startup financing

Alternative Investment Funds (AIFs) that have raised funding from SIDBI Fund of Funds for Startups (FFS) or are planning to as the government will now allow such PE-VC investors to claim a greater share of profits, thereby sweetening the investment into the startup space. As per a new Small Industries Development (SIDBI) circular, AIFs would be allowed accelerated drawdowns of the FFS‘s money and reap higher fees.

“SIDBI Fund of Funds for Startups (FFS) has committed more than Rs. 7,225 crores to around 86 Alternative Investment Funds (AIFs). Approximately one-third are first-time fund managers; there’s also a focus on inclusion for women-led funds and impact funds, as indicated in the recent notification. This committed capital has an almost 7x multiplier effect for the Startup-VC Ecosystem. SIDBI and DPIIT have been actively supporting AIFs and boosting the domestic capital ecosystem,” said Rajat Tandon, President, Indian Venture and Alternate Capital Association (IVCA), the PE-VC industry body working for these amendments alongside the government.

The fund of funds for startups (FFS) was introduced in 2016 for contribution to various alternative investment funds (AIFs) registered with the capital market regulator, SEBI. The FFS, run by the state-controlled SIDBI.

“Sidbi has been a prolific supporter of the venture ecosystem over the last decade. They have now brought about a few fundamental changes to how they will evaluate and invest in funds, like allowing fund managers higher rewards on carried interest and extending the framework to funds greater than Rs 1000 crores are welcome moves. It will allow a better risk-reward mechanism. Earlier, they had to stop investing in funds that have become successful because their size is greater than Rs1000 crores. Now SIDBI and, therefore, the government can reap the benefit of their earlier risk on new fund managers by continuing to invest as these become successful. Over a period of time, I see that with these few changes and hopefully a few more that we can expect over the next few years, we will have a world-class sovereign wealth fund with best-in-class terms as well as best in class asset managers,” said Ashish Fafadia, Partner, Blume Ventures adding that this latest announcement was the function of the last few meetings with the SIDBI team.

2021 was also a record year for PE/VC-backed IPOs with exits worth US$ 5.1 billion recorded across 44 IPOs. The SIDBI backed AIFs have created a multiplier effect in the ecosystem ever since its inception. SIDBI now wants to recognise and support more first-time fund managers and diversity, ESG along with also supporting its other successful investee AIFs.

“SIDBI has been doing yeoman work fostering early-stage startups by investing in VC funds for the past few years. This policy change circular is a strong step forward in that direction and very timely. Owing to this, SIDBI has streamlined their funding, which now creates more opportunities for Indian capital to be funnelled to startups. In addition, funds are being incentivized for better performance. This means a stronger pathway to create a feed-forward startup funding, with the returns from the past Fund of Funds likely being deployed to create further startups,” said Rajeev Suri, Managing Partner, Orios Venture Partners.

As per the industry body, the Indian PE, VC investors target an annual investment of over US$50bn by 2025, this can be achieved with a multi-stakeholder approach with government and financial regulators for long term policy stability, this SIDBI notification is a change in a positive direction.

“In a welcome move by the Government, investment through SIDBI managed FFS in eligible Indian AIFs can now be on better commercial terms when it comes to payment of management fee and carried interest to the qualifying and performing fund managers. Also, steps have been taken to extend more flexibility to fund managers in their day-to-day operations. SIDBI managed FFS has been the most active and leading domestic institutional investor in Indian VC Funds. The liberalisation of many existing onerous terms in the investment agreements will help align such terms with those prevalent globally,” said Tejesh Chitlangi, Senior Partner, IC Universal Legal.

According to SIDBI’s April 29 notification, the FFS will consider paying a higher management fee after considering the total expenses if a woman-led fund focuses on women-led startups, priority areas, agro-rural sector, financial inclusion, and is committed to investing in tier-2 -3 centres. As long as a fund’s investment manager is a domestic entity, the key persons or managers have managed funds; the FFS is also open to investing in funds above Rs 1,000 crore corpus.

The PE, VC backed portfolio companies have emerged stronger despite the pandemic, across all stages i.e., from seed to growth to buyout. This asset class contributes in nation building with a focus across real estate & infra to global dominance via technology, pharma etc. The growth in tax base of PE, VC backed companies is also evident as 1.9x more taxes have been paid as compared to the non-PE, VC backed companies.

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