Family offices in India still allocate 1% or less of their portfolio capital to start ups, as opposed to their peers in China.
Almost a decade after he sowed the seeds of a VC fund, Ranjan Pai has a happy problem. The $100 million Aarin Capital, which he co-runs with former Infosys CFO Mohandas Pai, has backed around 40 tech-intensive ventures. But it is eating into his already busy schedule.
“It is taking a lot of our time,” says Pai, chief executive & managing director of Manipal Education and Medical Group (MEMG). “We have to decide whether it makes sense to do this, or do it as a fund of funds.”
Aarin, registered with the Securities and Exchange Board of India (SEBI), is run like a family office, which manages the proprietary investments of Ranjan Pai. For the next wave, it has diversified across existing and new technology-focussed funds: Aaruha, Exfinity Venture, Saha, Singular, Unitus, Ideaspring, Kae, Alpha, Neev, Zodius, Tandem, Capria and Jungle Ventures.
“They are essentially giving money to fund managers to go out and invest in venture capital firms,” says an investor in Bangalore, who has known the Manipal Group for decades. “It is only growing.”
According to an estimate by advisory PricewaterhouseCoopers, family offices in India allocate 1% or less of their portfolio capital to startups, as opposed to their peers in China or developed countries that mark out up to 15% of their holdings to riskier, long-term bets. Compared to the global counterparts, only Azim Premji’s Premji Invest has punched above its weight with $3 billion of assets under management, but even that is predominantly in the public markets.
For startups in India, family offices are becoming a crucial pool of funds between angel investors and VC funds. The prominent ones are Hero Group’s Sunil Munjal, Ronnie Screwvala’s Unilazer, and Dabur Group’s Burman Family Holdings, with the likes of Uday Kotak now showing interest in starting a family office. The family offices are just seeking greater value by taking small stakes in VC firms, which are an ecosystem of startups in their own right.
“In terms of appetite, family offices don’t function like regular fund managers,” notes Karthik Reddy, co-founder and managing partner of Blume Ventures, the first domestic VC fund in India. It was set up in 2011, and family offices have been LPs (limited partners) in Blume.
“At most, they make four or five investments in a year. But their intent is: by putting Rs 6 crore or Rs 8 crore across three (VC) funds across three years, they have the opportunity to invest Rs 20 crore to Rs 25 crore, and get better leverage to play in the portfolios of these funds,” Reddy explains.
The family office can do a follow-on investment, or co-invest with the VC fund in any of their companies, he adds. Effectively, they mitigate risk, while expanding the view of the venture ecosystem.
It helps that VC funds’ growth has been extraordinary in the past three years, especially after SEBI introduced regulations in 2012 to recognise ‘alternative investment funds’ (AIF). An AIF, it said, is a privately pooled investment vehicle which collects funds from investors, whether Indian or foreign, for investing in accordance with a defined investment policy.
The SEBI thrust was instrumental in family-promoted businessmen taking interest in startups or private ventures, beyond their activity as individuals. “It has allowed small and domestic funds to be set up more efficiently, and to attract capital from domestic and international investors,” says Arihant Patni, the younger son of Gajendra Patni, former co-founder of Patni Computer Systems (PCS).
After the Patnis sold PCS to iGate in 2011, Arihant Patni and brother Amit anchored a fund called The Hive, with a team in Palo Alto, focussed on big data ventures. Since then, the duo invested in Ideaspring Capital, a $25-million early stage fund anchored by Mohandas Pai, and whose managing partner is Naganand Doraswamy. These two funds operate in the enterprise tech industry (B2B), as opposed to consumer internet (B2C) for which the brothers invested in Nirvana Ventures, managed by Rajan Mehra (of Baazee.com fame).
“We have seen the ecosystem evolve, be it companies, sectors, entrepreneurs or investors, and a lot of learning has happened in that time,” says Arihant Patni, whose family office Patni Financial Advisors operates separately from the VC funds in which he and Amit Patni have invested.
The regulatory framework also enthused successful first-generation entrepreneurs to start SEBI-registered venture capital funds. Between first-generation entrepreneurs and family businessmen, the number of family offices is estimated to be more than 1,500.
Meanwhile, the number of SEBI-registered AIFs is a shade less than 350 funds. Family offices are looking to invest in this emerging pool of VC funds. Deemed as ‘Category I’ AIFs, the investments made by SEBI-registered VC funds has grown by 191% to Rs 2,403 crore ($375 million), as of September 2017. The quantum of funds raised was at Rs 3,391.7 crore, according to quarterly information submitted to SEBI by registered AIFs.
Even the likes of Ratan Tata, who began to invest in his personal capacity in 2014, has since formed UC-RNT Fund, an alternative investment fund that partners RNT Associates and the University of California. It works closely with VC funds like IDG India, Kalaari, and Jungle Ventures.
But it’s still early days because of the available pool of startups, in which VC funds and family offices can invest. According to trade body for the IT and startups sector, the total startup base was between 5,000 and 5,200 in 2017, growing at 7% over the previous year. While this makes India the third-largest startup hub in the world, the public equity markets have larger volumes.
“Most family offices need a flourishing breadth of PE and VC firms,” says the investor in Bangalore, who requested anonymity. “We don’t have enough of them in the ecosystem, but it is growing. As they grow, family offices will put in more money,” he explains.
“Earlier, angel investments were not happening from the family offices,” says Padmaja Ruparel, president of Indian Angel Network (IAN), which raised its maiden Rs 350-crore fund in May 2017 after a decade of operations. “The angel investment decisions resided with the owner or an individual HNI (high net worth individual).”
It made sense for family offices to focus on other asset classes like real estate. “Now, startups have moved into the family office circuit, and are considered a part of the portfolio. The engagement level for start-ups has moved from individual-HNI to individual-HNI’s family office,” she says.
As groups like IAN institutionalised angel investing, Ruparel says family offices are comforted that there is a structure, process, diligence, and the ability to leverage networks that reduces risks in this asset class. She cites IAN’s early finds like Druva, a data protection and management company in which it put money in 2010, and whose valuations have soared. “There has been that track record of ventures which have given huge returns. That’s why this asset class has grown,” she says.
While an individual promoter may still take a final decision, the family office puts in far more groundwork: connecting the entrepreneurs with the family business networks, collating the market data, and analysing.
With different sectors emerging, they are also ramping up their teams to get investment bankers, and people who have been soaked into the startup ecosystem. “The decision to invest in a startup at lead levels cannot be based on data,” says Ruparel. “There is really no data, but decisions have to be based more on understanding the operational aspects, the startup team and their projections.” This is a change from other asset classes, like public markets which are driven by data points and number crunching.
Crucially, family offices also come in with VC funds at the expansion or growth stage of startups, says TC Meenakshisundaram, managing director of IDG Ventures India, a VC fund. “It is not looked at as risk capital, but they help by deploying meaningful sums to startups.” IDG Ventures’ portfolio companies like Lenskart have attracted capital from Unilazer and Premji Invest. “Through quarterly updates from VC funds, family offices get to know more about emerging companies,” says Meenakshisundaram. “At the appropriate stage, they are happy to deploy capital.”
“Right now, there are very few startups to put capital in, apart from public markets because the investment centres for private deals are not yet regularised,” says the investor in Bangalore, adding that family offices have new and happy problems. “They need active management of these private deals, which is why the money is now going to VC funds.”
Ranjan Pai of MEMG agrees, saying the metrics he uses in his core business went out of the window. For him, the question became: ‘Can we build good fund managers?’, so that as we have new liquidity and more startups come by, we can looking at funding those entities. As long as it is not a distraction, I enjoy it because it gives me a fresh perspective of business—of how entrepreneurs see the world.”