Venture Capital: To increase startup financing, the government offers incentives to VC, PE funds

Bombay: The government will leave risk capital (VC) and private equity (PE) funds take a larger share of profit, earn more commissions, and aim for a faster withdrawal of the money they receive from the state fund of funds.

The bottom of funds for startups (SBB) was introduced in 2016, due to the contribution to various alternative investment funds (AIF) registered with the capital market regulator Sebi.

SBB, managed by the Small Industries Development Bank of India (Sidbi), has invested more than Rs 9,400 crore in 86 AIFs (the regulatory term for PE and VC funds).

Sidbi is from the country largest limited partner (LP) or investor contributing to the capital of VC and PE funds.

In a letter dated April 29, 2022, Sidbi told AIFs that it would allow “accelerated withdrawals” of the money pledged by SBB as fund managers achieve an internal rate of return (IRR) above the hurdle rate, the minimum return a fund has to stamp before profits can be shared between investors and fund managers.

“These are concrete steps to ensure that SBB’s investments in eligible Indian SBBs can be on better trading terms in terms of management fees, reported interest for qualified and performing fund managers, while also extending greater flexibility to fund managers to their timing – to day-to-day operations. Sidbimanaged SBB has been one of the largest national institutional investors in Indian VC funds and the liberalization of many burdensome terms existing in investment agreements will help align those terms with those prevailing globally, “said Tejesh Chitlangi, senior partner, IC Universal Legal.

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As AIFs often take a long time to mobilize capital from other investors, a faster withdrawal of the money committed by the SBB will not hinder the ability of the AIFs to conclude agreements.

The “carry” or profit sharing (once the fund’s IRR exceeds the hurdle rate) is typically in the 80:20 ratio, with 20% going to the manager. The FFS is now ready to pass 25% of the incremental returns (in addition to the new IRR) if the IRR exceeds 25%. The carry rate would be 30% (of the incremental return) if the fund achieves an IRR above 30%.

SBB, as per Sidbi’s letter, will consider paying a higher management fee after taking an overall view of total expenses and, if a fund is led by women, it focuses on startups led by women, priority areas, agro-rural sector, finance inclusion and is committed to investing in level 2 and -3 centers. SBB is also open to investing in funds in excess of Rs 1,000 crore corpus as long as the investment manager of a fund is a domestic entity, key persons or managers have managed funds that Sidbi has committed to in the past and exposure is limited to the same level applicable for a fund with a corpus of Rs 1,000 crore.

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