VC and private equity firms have always been fundamentally different but PE funds are showing VC-like risk appetite in some recent deals

More and more PE firms are looking at growth-stage investments in startups amid the wave of startup IPOs and exits through secondary sales

While having PE funds on the cap table brings a measure of maturity to companies, many PE-backed startups have not yet fully grown into their valuations

The line between venture capital and private equity in India is fading rapidly. More and more PE firms are looking at late-stage deals and even growth-stage investments in startups as VC appetite wanes and as funds look to exit their portfolio companies at the right time.

The wave of secondary deals and ‘forced exits’ is driving the PE ecosystem. The likes of Kedaara Capital, Investcorp, TVS Capital, ChrysCapital are now giving a VC-like twist to the traditional PE investment thesis.

Besides global funds such as KKR, Blackstone, CVC, Warburg Pincus, Silver Lake, Carlyle Group, General Atlantic and others have also backed some of the most scaled up startups in India since 2014.

In many cases, these global PE giants came in at a much earlier stage than they might have in the US or Europe because of their experience in scaling up tech giants in the US. It was believed that having these PEs on the cap table would bring a measure of maturity to the Indian tech ecosystem much faster than otherwise.

The Blurring Of Lines

VC and private equity firms have always been fundamentally different. Venture capital comes in early, even at the pre-revenue stage, and therefore, VCs assume a lot of the risk inherent in startup investments. Over the years, the returns and investment horizons have been built around this risk factor.

As one PE fund manager told Inc42 this week, “VCs are the pioneers, but this takes time. They sit on the cap table for decades and have a soft influence. But PEs require more control. In India, PEs have long acted like VCs and have been patient with their bets, and now they are seeing these bets pay off with public listings of startups and secondary deals.”

PE firms differ significantly from VCs and are classed separately because of the stage at which they come in. “That was a trend some time ago when global VC funds used to write large cheques for growth stage Indian startups. Of late, very few venture capital firms are willing to engage in $100 Mn deals as standalone investors. The funding winter has not completely thawed and VC funds are pulling back in certain sectors,” Gaurav Sharma, head of Investcorp’s India business, told Inc42.

Take the example of Wakefit, which raised $40 Mn from Bahrain-headquartered Investcorp in January 2023 after reaching a scale of INR 800 Cr and more than 50 stores around India. Peak XV Partners invested five years before Investcorp and that investment saw Wakefit through the riskier stages and the early challenges.

Despite this, some in the PE world might call this an ‘early deal’ on Invescorp’s part, because compared to how PEs operate outside India, this is a fairly low ticket size and Wakefit does not have the solid track record that private equity players typically bank on.

Startups Reaching Maturity

Globally, PEs invest in companies that have an established track record of growing a sustainable business and look to exit in three to five years. On the other hand, some VCs stick around on the cap table for more than a decade without an exit. VCs also value companies based on potential rather than track record.

Fundamentally, PE is investing in mature companies, and with many startups showing some signs of a mature business, the Indian market is seeing a shift where PEs are eyeing growth-stage deals as well in addition to late-stage deals.

Bengaluru-based Wakefit crossed INR 1,000 Cr or roughly $120 Mn in revenue in FY24, whereas it is valued at well over $300 Mn. But with the company on the verge of profitability, it’s eyeing an IPO in the next two years and the late investors will look to exit.

One cannot deny the role played by IPOs in this because PEs like the fact that they can exit as per thesis on their exit points and still earn some value from the investment. As a result, we are seeing more small cheques from PEs, too, in companies that don’t need high capitalisation but just enough capital to get to the IPO stage.

Plus, in light of the lack of large size deals by VCs, many institutional investors are looking to invest in PE funds that are taking up pre-IPO positions through secondary deals or primary investing.

The Rise Of Indian Private Equity

Chennai-based TVS Capital Funds has a strong thesis on family-owned businesses and emerging sectors with large TAMs, which align with the PE fund’s strengths and the legacy of the family-owned TVS automobile empire.

TVS’ Gopal Srinivasan told Inc42, “Our portfolio construction is around three stages: venture growth, classic growth and late growth. Late growth is kind of moderate returns with very low risk, classic growth is medium risk, medium to high returns, and venture growth is higher risk and higher returns.”

Since its inception in 2007, the fund has invested more than INR 3,000 Cr across companies such as Nykaa, Digit Insurance, Five Star Business Finance, all of which have hit the public markets since. And often, these deals came at the venture growth stage.

But that doesn’t mean that PE funds don’t have their unique propositions. Sharma pointed to Investcorp’s $125 Mn buyout of NSEIT (the National Stock Exchange’s digital technology arm), which is completely beyond the scope of VC investing. He believes that in India, PEs are comfortable making such buyout or take-private deals as well as investing in growth stages as well, largely because of how the route to public listing has changed.

The Investcorp India head added that VCs have been instrumental in the startup growth story, but after reaching a certain scale a startup often requires a different organisational structure. Just like that companies require different systems and processes once they mature and therefore private equity deals are not just financial investments. They are inherently strategic in nature.

In a similar vein Kedaara Capital cofounder Manish Kejriwal believes that success in private equity goes beyond just delivering returns, and it’s about setting a culture of governance and systems for operations.

“Venture capital is built on identifying disruptive potential and nurturing new ideas, private equity focuses on optimising established companies for sustained growth and performance,” he said, but added that PEs cannot ignore the softer aspects of investing such as trust and mentorship and only look at the numbers.

Kedaara Capital raised a $1.7 Bn private equity fund, the largest ever in India, and is looking to bring its local expertise and deep knowledge of the key sectors to the startup ecosystem’s scaled-up companies. With the likes of Blackstone, Carlyle, General Atlantic, Warburg Pincus and others hunting for deals to exit their Indian portfolio companies, Indian PE firms are in the driver’s seat.

Kedaara cofounder Sunish Sharma has said in the past that the firm will look to provide exits to global backers that have plenty of dry powder but find themselves in need of more deal flow in India. “When you get a window for an IPO, you take it and don’t try to over-optimise it,” he said in an interview in July.

PE fund managers credit the IPO wave for the heightened PE deal activity in India even for traditionally weak sectors like consumer and retail as well as in healthcare, and core technology.

According to a report by Grant Thornton, India recorded 643 deals worth $17 Bn in the first half of 2024, with consumer-driven sectors leading the charge. Many funds are looking to reduce their exposure to China, which has definitely fuelled the manufacturing and EV sector.

There are challenges too. Most PE investors find it hard to deal with startups with overly rich valuations. This poses a hurdle for PE fund managers in securing the right deal. However, with several venture capital funds or alternative investment funds approaching end-of-tenure, they are putting their portfolio on sale and this is a particularly attractive proposition for PE firms geared towards buyouts.

VC and private equity firms have always been fundamentally different but PE funds are showing VC-like risk appetite in some recent deals

More and more PE firms are looking at growth-stage investments in startups amid the wave of startup IPOs and exits through secondary sales

While having PE funds on the cap table brings a measure of maturity to companies, many PE-backed startups have not yet fully grown into their valuations

The line between venture capital and private equity in India is fading rapidly. More and more PE firms are looking at late-stage deals and even growth-stage investments in startups as VC appetite wanes and as funds look to exit their portfolio companies at the right time.

The wave of secondary deals and ‘forced exits’ is driving the PE ecosystem. The likes of Kedaara Capital, Investcorp, TVS Capital, ChrysCapital are now giving a VC-like twist to the traditional PE investment thesis.

Besides global funds such as KKR, Blackstone, CVC, Warburg Pincus, Silver Lake, Carlyle Group, General Atlantic and others have also backed some of the most scaled up startups in India since 2014.

In many cases, these global PE giants came in at a much earlier stage than they might have in the US or Europe because of their experience in scaling up tech giants in the US. It was believed that having these PEs on the cap table would bring a measure of maturity to the Indian tech ecosystem much faster than otherwise.

The Blurring Of Lines

VC and private equity firms have always been fundamentally different. Venture capital comes in early, even at the pre-revenue stage, and therefore, VCs assume a lot of the risk inherent in startup investments. Over the years, the returns and investment horizons have been built around this risk factor.

As one PE fund manager told Inc42 this week, “VCs are the pioneers, but this takes time. They sit on the cap table for decades and have a soft influence. But PEs require more control. In India, PEs have long acted like VCs and have been patient with their bets, and now they are seeing these bets pay off with public listings of startups and secondary deals.”

PE firms differ significantly from VCs and are classed separately because of the stage at which they come in. “That was a trend some time ago when global VC funds used to write large cheques for growth stage Indian startups. Of late, very few venture capital firms are willing to engage in $100 Mn deals as standalone investors. The funding winter has not completely thawed and VC funds are pulling back in certain sectors,” Gaurav Sharma, head of Investcorp’s India business, told Inc42.

Take the example of Wakefit, which raised $40 Mn from Bahrain-headquartered Investcorp in January 2023 after reaching a scale of INR 800 Cr and more than 50 stores around India. Peak XV Partners invested five years before Investcorp and that investment saw Wakefit through the riskier stages and the early challenges.

Despite this, some in the PE world might call this an ‘early deal’ on Invescorp’s part, because compared to how PEs operate outside India, this is a fairly low ticket size and Wakefit does not have the solid track record that private equity players typically bank on.

Startups Reaching Maturity

Globally, PEs invest in companies that have an established track record of growing a sustainable business and look to exit in three to five years. On the other hand, some VCs stick around on the cap table for more than a decade without an exit. VCs also value companies based on potential rather than track record.

Fundamentally, PE is investing in mature companies, and with many startups showing some signs of a mature business, the Indian market is seeing a shift where PEs are eyeing growth-stage deals as well in addition to late-stage deals.

Bengaluru-based Wakefit crossed INR 1,000 Cr or roughly $120 Mn in revenue in FY24, whereas it is valued at well over $300 Mn. But with the company on the verge of profitability, it’s eyeing an IPO in the next two years and the late investors will look to exit.

One cannot deny the role played by IPOs in this because PEs like the fact that they can exit as per thesis on their exit points and still earn some value from the investment. As a result, we are seeing more small cheques from PEs, too, in companies that don’t need high capitalisation but just enough capital to get to the IPO stage.

Plus, in light of the lack of large size deals by VCs, many institutional investors are looking to invest in PE funds that are taking up pre-IPO positions through secondary deals or primary investing.

The Rise Of Indian Private Equity

Chennai-based TVS Capital Funds has a strong thesis on family-owned businesses and emerging sectors with large TAMs, which align with the PE fund’s strengths and the legacy of the family-owned TVS automobile empire.

TVS’ Gopal Srinivasan told Inc42, “Our portfolio construction is around three stages: venture growth, classic growth and late growth. Late growth is kind of moderate returns with very low risk, classic growth is medium risk, medium to high returns, and venture growth is higher risk and higher returns.”

Since its inception in 2007, the fund has invested more than INR 3,000 Cr across companies such as Nykaa, Digit Insurance, Five Star Business Finance, all of which have hit the public markets since. And often, these deals came at the venture growth stage.

But that doesn’t mean that PE funds don’t have their unique propositions. Sharma pointed to Investcorp’s $125 Mn buyout of NSEIT (the National Stock Exchange’s digital technology arm), which is completely beyond the scope of VC investing. He believes that in India, PEs are comfortable making such buyout or take-private deals as well as investing in growth stages as well, largely because of how the route to public listing has changed.

The Investcorp India head added that VCs have been instrumental in the startup growth story, but after reaching a certain scale a startup often requires a different organisational structure. Just like that companies require different systems and processes once they mature and therefore private equity deals are not just financial investments. They are inherently strategic in nature.

In a similar vein Kedaara Capital cofounder Manish Kejriwal believes that success in private equity goes beyond just delivering returns, and it’s about setting a culture of governance and systems for operations.

“Venture capital is built on identifying disruptive potential and nurturing new ideas, private equity focuses on optimising established companies for sustained growth and performance,” he said, but added that PEs cannot ignore the softer aspects of investing such as trust and mentorship and only look at the numbers.

Kedaara Capital raised a $1.7 Bn private equity fund, the largest ever in India, and is looking to bring its local expertise and deep knowledge of the key sectors to the startup ecosystem’s scaled-up companies. With the likes of Blackstone, Carlyle, General Atlantic, Warburg Pincus and others hunting for deals to exit their Indian portfolio companies, Indian PE firms are in the driver’s seat.

Kedaara cofounder Sunish Sharma has said in the past that the firm will look to provide exits to global backers that have plenty of dry powder but find themselves in need of more deal flow in India. “When you get a window for an IPO, you take it and don’t try to over-optimise it,” he said in an interview in July.

PE fund managers credit the IPO wave for the heightened PE deal activity in India even for traditionally weak sectors like consumer and retail as well as in healthcare, and core technology.

According to a report by Grant Thornton, India recorded 643 deals worth $17 Bn in the first half of 2024, with consumer-driven sectors leading the charge. Many funds are looking to reduce their exposure to China, which has definitely fuelled the manufacturing and EV sector.

There are challenges too. Most PE investors find it hard to deal with startups with overly rich valuations. This poses a hurdle for PE fund managers in securing the right deal. However, with several venture capital funds or alternative investment funds approaching end-of-tenure, they are putting their portfolio on sale and this is a particularly attractive proposition for PE firms geared towards buyouts.