Why Indian Family Offices Are Pouring More And More Money Into VC Funds

Indian money is coming in a big way and with a lot of confidence and courage, say venture capitalists

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India's venture capital (VC) firms have been predominantly backed by global offices for many years. However, today, the tables have turned. VC firms are seeing a huge percentage of capital coming from Indian family offices in their recent funds. The second-generation entrepreneurs of these offices have become more active as limited partners (LPs). A case in point is Blume Ventures, which recently closed its largest India-dedicated fund at $250 million. The firm told us in an exclusive interview that this time around 40 per cent of the capital came from Indian LPs.

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"This time, we had an unexpected outcome, a slightly divergent theme, where Indian money came in a big way. With a lot more confidence and a lot more gumption," said Karthik Reddy, managing partner at Blume Venture Advisors.

Kae Capital also has a similar story. The firm, which closed its third fund recently, to invest in healthcare, financial service, consumer products, business products and service sectors, saw 50 per cent of the money coming in from Indian family offices. Sasha Mirchandani, founder and managing director of Kae Capital asserts that not only is he seeing a dramatic change and a huge part of the money coming into India between last quarter and now, but these investors are also more actively involved.

"They ask the right questions, they have picked up on speed and they understand the asset class much more than earlier. It is mostly the second generation that is today running these family offices. They are very competent and put large cheques into our funds," said Sasha. He is also very confident that if the firm shows results, more money will be poured in.

Indian family offices and ultra-high-net-worth individuals (UHNIs) have been the 'top source for domestic capital in the VC ecosystem'. They accounted for nearly 60% of domestic capital raised in 2021, says the sixth edition of Innoven Capital's 'Early Stage Investments Insights Report - India'.

Ganesh Rengaswamy, co-founder and managing partner, Quona Capital also agrees that Indian family offices are one of the fastest-growing categories of investors in Venture funds. Quona is a global emerging markets fund that invests in fintech and verticalized finance across 15 countries. "Unfortunately, we have not yet been able to benefit from the significant interest from Indian family offices due to the restrictions they have on investing in global funds," said Rengaswamy. However, the firm is in the process of figuring out solutions to unlock that interest.

According to media reports, India has over 250 family offices, each with an average asset under management of over 100 million dollars. This includes the likes of Ratan Tata, Pawan Munjal, Gautam Adani, Azim Premji, among others.

Factors leading to this trend

The creation and evolution of Indian family offices are recent phenomena. The key reason it has picked up is the evolution of India's startup ecosystem and venture capital industry, startup stories making global media headlines, and startups touching unicorn and IPO milestones, among others. This has led to an increased interest in Funds.

"There are several case studies of venture funds that have been successful in generating significant returns for their limited partners. Attractive risk-adjusted returns, experienced fund managers, the maturation of the startup ecosystem in India, and examples of venture-backed companies going for IPO are making the sector attractive for Indian family offices," said Vinod Keni, managing partner, Indian Angel Network. The firm's last fund had a mix of limited partners. Institutions, family offices and UHNIs participated as limited partners. A significant portion of the capital commitments was from family offices, including smaller and first-time family office investors.

Keni also feels that Indian family offices have now realized that Indian fund managers can proactively manage the investments and portfolios better than the family office which may not have the experience necessary to manage these investments. "Depending on allocation and risk, within the venture capital sector, there are multiple sub-asset classes like venture debt, micro VC, distressed and expansion stage that offer attractive returns, which is prompting Indian family offices to allocate a significant portion to this asset class," said Keni.

Another key factor is the booming Indian economy. This has led to the proliferation of wealth and the dramatic increase in the number of millionaires, centimillionaires and billionaires around the world. These UHNIs are now looking beyond the traditional wealth-creation such as public market, real estate and gold and are beting the investible surplus on India's burgeoning startups via the VC funds route.

"There is a rise of new wealth. Second and third-generation of families have higher risk appetites and as such are more open to these types of investments. There has also been a rise in newer family offices belonging to tech founders. These founders have a strong understanding of this asset class and deep relationships in the ecosystem which makes them better placed to invest in venture capital," said Sumegh Bhatia, CEO and MD, Lighthouse Canton, India.

The firm's last Fund was the LC Nueva Alternative Investment Fund, which was raised through its partnership entity LC Nueva Investment Partners and was focused on investing in pre-series A and series A deals in India. The fund reached a close of around $45 million with support from global investors and several family offices. Around 40 per cent of this capital came from Indian family offices.

Alternate assets like VC funds also act as good diversifiers for the overall investment portfolios of these offices due to the lower volatility and uncorrelated nature of these investments as compared to traditional asset classes. "Yield plays have been the usual strategies they focus on as the key objective for many of them has always been capital preservation. More recently we've started to see more families set aside part of their portfolio for growth investing into the early stage or growth stage ecosystem where maximum returns can be made," added Bhatia.

Additionally, unlike the past, Indian business houses have organized their family offices and investment approach. "They do this either by recruiting professionals to manage these offices or seeking professional help via wealth-management firms to 'rightly' advise them on investments, risks, diversification etc. In addition, progressive Regulatory framework has reduced the friction and made it less cumbersome to invest in alternate assets, especially through alternate investment funds (AIFs)," said Kapel Guptaa, director - finance, MegaDelta Capital.

Further, becoming an LP in various funds provides them access to high-quality deals through co-investment rights, thereby helping them stay up-to-date about emerging business models and opportunities across the globe. "Through continuous interactions with fund managers on their investment thesis, emerging trends and technologies, many are using this opportunity to improve their investment decisions and knowledge of the space," said Bhatia.

The Impact

While it is a win-win for both Indian family offices and VC firms, how it will benefit the startups in the country is an important question. Will this active participation of Indian family offices lead to firms writing larger cheques to Indian startups? "Since almost 40 per cent of our fund is Indian money, this means I cannot afford not to pool my capital here," said Reddy.

"This will lead to more venture funds being launched by fund managers, more experienced fund managers launching funds of their own, and also larger funds, which may commit larger amounts to Indian startups," added Keni.

Further, with more Indian family offices writing cheques to VC funds can lead to larger funds, allowing them to invest across stages into the startups. "For instance, an early-stage VC fund can also participate in later stage round to ensure that the outcome to its LPs from the 'winner' is really outsized. Especially in times where global capital (mainly US/Europe) is scarce, larger Indian funds can extend funding support to their 'winners' on the path towards maturity and eventual exits," said Guptaa.

Guptaa also feels that with the startup financing ecosystem maturing, and the capital needs of Indian startups increasing, coupled with certain apprehensions around global capital (mainly the US – the largest contributor to startup funding) there are multiple opportunities for more Indian capital being diverted to Indian startups. "This could reap significant returns for Indian capital deployed in current times as once the global economic scenario stabilizes, the foreign capital would be back looking at deals in India thus providing great exit opportunities," he said.

As maturity sets in, these family offices may also take a hybrid approach of investing indirectly in startups, that is, through funds and also directly pouring in capital to the startups based on their capabilities and risk profile. "While many family offices have already realized strong returns from venture investments, they are constantly looking for more systematic ways to allocate capital and this interaction with such funds provides them that opportunity," said Bhatia.

Overall, investors are confident that in years to come more and more families will be open to exploring emerging alternative asset classes such as venture capital or venture debt.

With inputs from Soumya Duggal