Early bets, high profits is new investor mantra

By: | Updated: May 3, 2015 1:50 AM

Early-stage average deal value $50 m plus, cheque size double.

investor mantraAs per Venture Intelligence, in 2007, there were 91 deals in the early stage, which increased to 178 deals in 2014. (Thinkstock)

In a mark of rising confidence and valuations, investment platforms across hedge fund, venture capital and private equity (PE) firms are keen to lock higher profits by taking earlier investment bets in portfolio companies in relation to their traditional investment pattern.

“Investment firms are taking earlier bets. Funds that typically participated in Series C are now doing Series B, and those doing Series B are now doing Series A,” says Mukul Singhal, principal at SAIF Partners. Series A refers to the first round of financing by the investor into a portfolio company and represents early-stage investment. Likewise, successive funding rounds by investors into the company are referred to as Series B, Series C and so on.

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PE fund managers say the average deal value has moved north of $50 million, while the average cheque size at the level of early investment has doubled from the $2 million-$5 million range to the $5 million-$10 million range.

“Funds that invested $20 million to $25 million dollars in Series C are suddenly getting pushed out of that market, because Series C is now happening at $50 million. So a new set of players have replaced the old set of players. And then the old set of players, instead of doing Series C, have started doing Series B and Series A,” Singhal added.

As per Venture Intelligence, in 2007, there were 91 deals in the early stage, which increased to 178 deals in 2014. During the same period, late stage deals declined from 168 in 2007 to 93 in 2014.

For example, investment firms like Temasek have traditionally refrained from early-stage investments in the country, opting to invest in listed companies that include cement major ACC, Adani Ports, GMR Energy and Max India. In 2007, Temasek had invested around $2 billion to buy 4.9% stake in India’s leading telecom company, Bharti Airtel. This is considered to be one of the biggest PE deals in India.

In May 2014, Temasek announced its foray into the e-commerce segment by co-investing an undisclosed amount in Snapdeal. And on April 14, Temasek announced its entry into the venture debt segment via acquisition of InnoVen Capital India, formerly known as SVB India Finance, for Rs 300 crore.

Similarly, Carlyle, which had picked up 5.6% stake in India’s leading finance company HDFC for Rs 2,638.25 crore in 2007, is now an active early-stage investor in unlisted companies like Starhealth and Tirumala Milk Products.

The rise in the valuation of listed companies, along with improving depth and opportunities in the unlisted space, has contributed to the shift in investment allocations.

“There are many companies that are not listed but have great potential,” says Vishakha Mulye, managing director and chief executive at ICICI Venture. Sequoia Capital India, for example, had no seed investments in its portfolio in 2010, but in the first quarter of calendar year 2015, the investment firm has already announced two seed investments in start-ups PepperTap and PressPlayTV.

Also, Sequoia Capital India had sealed two deals at the Series A financing round in 2010, this has increased to seven deals in just the first quarter of calendar year 2015 in companies such as Grabhouse and CapitalFloat. With no seed investments in 2010, Accel Partners had closed six seed investments in 2014 in companies such as Gridants and Wizrocket.

Similarly, Tiger Global has not been an active Series A investor. Yet, in the first quarter of 2015 alone, the hedge fund has led five rounds of Series A financing in companies like Grofers, Roposo and Moonfrog Labs. Singhal says the shift in investment strategy requires the approval of limited partners. “If it is a very strong shift, investment firms have to inform their limited partners. When SAIF started doing Series C investments, we informed our limited partners of the shift,” Singhal added.

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