Bridging the gap between public markets and private equity – experts weigh in
As India’s equity markets experience a remarkable surge, driven by robust participation from domestic institutional investors and a significant influx into mutual funds, a contrasting narrative unfolds in the private equity and venture capital sectors.
Despite the country’s undeniable savings potential and enthusiastic investment sentiment, homegrown PE/VC investors are grappling with the challenge of raising domestic funds to propel the growth of Indigenous entrepreneurs. This dichotomy raises an essential question: how can we achieve Atma Nirbharta (self-reliance) in financing India’s entrepreneurial ventures and catalysing the nation’s growth story?
In an interview with CNBC-TV18, Gopal Srinivasan, Chairman and Managing Director of TVS Capital Funds, shed light on the perplexing disparity between investments in public markets and private equity. “India has roughly about ₹4 trillion worth of commitments made from rupee capital to private equity and venture capital funds,” he notes. This figure, when juxtaposed with the Rs 110 trillion flowing into mutual funds from domestic institutions and retail investors, underscores a stark 15:1 difference.
Srinivasan also highlighted the need for more VC/PE funds and fund managers to meet India’s ambitious $10 trillion GDP goal, which necessitates around Rs 40 trillion from private equity and venture capital.
Gopal Jain, Managing Partner at Gaja Capital, echoes these concerns, highlighting the risk of foreign capital disproportionately owning a significant portion of India’s unlisted private sector. Drawing parallels to the public markets of 10-15 years ago, he warns that without timely reforms and a stronger connection between domestic savings and the PE/VC sector, India might lose control over its growth narrative. “There is nothing wrong with some of it being owned by foreign capital, but the question is disproportionately owned by foreign capital,” Jain cautions.
However, Ashwin Chadha, Co-Founder of Anicut Capital, offers a more optimistic perspective, observing an increasing participation from retail investors in private markets. He stresses the importance of larger ticket sizes from institutions and the need for more organisations like SIDBI, which have anchored and supported new fund managers.
Chadha is confident that in the next five to ten years, there will be substantial rupee capital backing unlisted companies through funds.
Below are the excerpts of the discussion.
Q: Why this discrepancy? While it is very clear that there is no dearth of savings or investment sentiment in the country.
Srinivasan: India has roughly about ₹4 trillion worth of commitments made from rupee capital to private equity and venture capital funds. Just think about comparing this with Rs 110 trillion that is coming from mutual funds, that is domestic institutions and from retail into public markets. That gives you a very, clear idea. When you compare the amount of private equity investments made each year, most of the time they are more than the total fresh IPOs raised, which is a comparison benchmark to ask the question, why this 15:1 difference between public market investments and private equity, when we know that the top quartile funds are all returning north of 20% IRR. That, I think, is a puzzle which we have all been working on to solve so that we can get more Indian money to VC/PE. Most importantly, we need a hundred more VC/PE funds to reach the $10 trillion GDP goal, which by itself needs about Rs 40 trillion worth of capital from private equity and venture. All I’m saying is, we need more funds and we need more fund managers because we need more enterprises to come from more entrepreneurs.
Q: One thing that stands out to me as an Indian is also that are we exporting a large part of growth that PE/VC money has made out of our own Indian entrepreneurs’ growth story and their ability to create value?
Jain: So that’s currently happening. If you see our private sector, a very vast swath of the unlisted private sector is owned by foreign capital. Very similar to the situation in public markets, let’s say, 10-15 years ago. Today, domestic institutional investors have emerged as larger investors, and we have Indianised the holding pattern of listed companies. If we don’t take corrective measures, if we don’t do these stroke of pen reforms, and if we don’t connect the Indian venture capital, private equity sector to the Indian savings, then today just as most of our unicorns are owned by foreign investors, our unlisted private sector will be owned by foreign capital. There is nothing wrong with some of it being owned by foreign capital, but the question is disproportionately owned by foreign capital.
Q: What are your views and how does a breakthrough really happen in this? Because the mutual fund investment culture really came in after demonetisation to a large extent. According to you, what can be a breakout moment to achieve this in the private space?
Chadha: I’m seeing more and more participation from retail in private markets. We have to get more larger ticket sizes from institutions also. SIDBI has been at the forefront, they’ve anchored our first fund and have been supporting a lot of new fund managers. Like that, we need many, many more organisations. If you see the returns, this has been a very lucrative investment avenue for the first few set of investors. I have no doubt in the next five or 10 years, we will have a significant amount of rupee capital backing unlisted companies through funds.
Q: You recently raised funds, you have gone through the whole exercise, how has been your experience and what percentage of your fundraise really came from domestic and what percentage from foreign capital?
Srinivasan: We were very lucky. In seven months of SEBI approval, we’ve been able to raise about ₹2,300 crore of pure rupee money. We have never taken a dollar in any of our funds by choice because we’re a mission-mode company for India. What I really want to use is to focus on a simple idea that Gopal Jain, Ashwin Chadha,, we were all first-time fund managers. We did not come out of any other fund management platform. We always basically sort of learned to raise a fund by our own. We have got about 60 new micro VCs since COVID. But we need 200 more people, India needs those managers. And if we don’t have domestic capital, we don’t get those fund managers. Actually, that worries me more. I feel like a minister in the 60s government worried about small scale industry because it is from the small scale industry that the giant industrialists came. That was a nursery of entrepreneurs.
