Key Sectors And Stages LPs Directly Investing In Startups Are Betting On Venture capitalists and other experts share their observations and thoughts

In one of our recent stories, we spoke about how we are seeing a lot of limited partners (LPs) today moving into direct investments. These deals not only give LPs access to companies' cap-table but come with zero management fee.

Experts told us that the primary driver of this trend is an attempt by LPs to boost returns, while also retaining greater control over their capital. What most LPs generally do is begin by co-investing in the initial rounds and then choose to invest directly in later rounds. "This helps them garner greater experience in newer markets, sectors, and investment themes. LPs tend to get extra gains as they get more preferential management fees and carry on co-investment deals," Vivek Soni, partner and national leader, private equity services, Ernst & Young had said.

While it was established that institutional and HNI LPs are both more comfortable participating directly in the private equity pipeline, we asked experts to share their thoughts on the sectors and stages they are betting on and here is what they said.

Rajat Khurana, senior vice president–private markets, Lighthouse Canton India: There are primarily two kinds of investors in private transactions, namely, Financial Investors and Strategic Investors. Financial investors seek to invest money and generate profits as the company grows. Strategic investors invest in businesses that are a natural extension of their existing business (For example: a hospital chain looking to invest in a diagnostic start-up).

Since we have established what are the types of investors in the market, let us look at what kind of investments LPs are looking at. Having interacted with many family offices we have realized that generally, the same LP can be both a financial investor and a strategic investor at the same time depending on the company they are investing in. Also, we have seen a trend of LPs leaning towards industries and sectors that they have a better understating of, The behaviour is also driven by which way the wind is blowing and where is the interest of the market at the time of investment.

Pranav Pai, founding partner and CIO, 3one4 Capital: We have seen LPs being actively involved across the lifecycle - from the seed round until the IPO roadshow. Our LPs have invested in several of our portfolio companies directly already, and have picked sectors for either strategic interests or financial returns per their discretion. The majority of the direct LP interest is concentrated on the mid stage - from Series B to D predominantly - where the product market fit is clear and the business model is more established.

Rajeev Suri, managing partner, Orios Venture Partners: Generally, LPs tend to look at late-stage startups that have gotten their product market fit and are on their way to becoming reasonably large brands with a strong customer base and a solid business model. They could be in a wide range of sectors (consumer, deep tech, AI, etc) and could be across a range of industries including healthcare, industrial, agri tech, etc.

Deepak Padaki, president, Catamaran: LPs' investment strategy would depend on several factors like capital to be invested, size of the investment team, domain expertise, risk appetite, etc. Typically, LPs like to invest in sectors they have domain expertise in which allows them to identify investment opportunities and add value to portfolio companies.

Ankur Bansal, co-founder and director, BlackSoil Capital While the investment preferences can vary, LPs may target startups operating in high-growth sectors such as e-commerce, fintech, healthcare, software-as-a-service (SaaS), clean energy, or cybersecurity. These sectors typically offer attractive market dynamics, strong demand, and potential for scale and profitability. Emerging technologies, such as artificial intelligence, blockchain, the Internet of Things, or biotechnology, is another startup sector that LPs might be keen on exploring as it has transformative potential and can offer opportunities for significant growth and innovation. Recently, LPs prefer investing in mature businesses at later stages, such as Series B or beyond, and target profitable companies.

Vivek Soni, partner and national leader, private equity services, Ernst & Young: While most LPs started by investing in traditional sectors like Infrastructure, Real Estate, Consumer, etc in companies that were in the mature stages the trend has shifted off-late with many LPs investing into startups as well but that is however restricted to the late stage generally before they turn unicorns as those businesses have a better track record and also the capacity to absorb large cheque sizes that most LPs would prefer to deal in. They have even started investing in new-age businesses in e-commerce, technology, media and entertainment, edtech, fintech, etc in the past couple of years as the startup ecosystem in India has grown in strength and size.