Kotak Investment Advisors (KIAL) decided to pause its Kotak India Alternate Allocation Fund, a Fund of Funds (FoF) that was launched last year to invest primarily in private equity (PE) and venture capital (VC) funds.
Kotak India Alternate Allocation Fund was set up as an Alternative Investment Fund under SEBI regulations. The fund targeted to raise ₹1,500 crore, including a greenshoe option (right to collect more funds than originally planned) of ₹750 crore. The fund’s objective was to diversify across PE/VC funds in multiple sectors, including consumer, technology, healthcare, financials, etc, as well as across multiple stages, from early stage to growth stage and late stage across different vintages. ‘Vintage’ refers to the first year the fund starts investing in companies.
By introducing a FoF, KIA aimed to solve the problem of concentration risk in VC investing due to high minimum investment requirements. “Lack of knowledge and information availability in this asset class makes it difficult to make an informed choice. Through Kotak’s Fund of Funds we intend to provide investors access multiple funds as well as leverage our institutional diligence with peer benchmarking data available, coupled with institutional monitoring of long tenure funds," said Nidhi Chawla, Fund Manager, Kotak India Alternate Allocation Fund at the time of fund launch. The fund was likely introduced on the back of increased interest from the high-net-worth individuals (HNIs) to invest in private equity space in the last few years.
According to experts the venture capital or private markets, private debt market space stood matured in the last year or two compared to what it was five years back and this led to a sense of comfort among many investors. In 2020-2021, the private markets witnessed seeing exits through secondary market or otherwise. Exits provided visibility and that’s what’s caused a lot of wealthy people to see this as a viable proposition.
However, given the global macro-economic headwinds in the last year or so, there has been a ‘funding winter’ for startups, which means to say reduced capital inflows to startups. Companies in the startup space witnessed a meltdown and their valuations corrected.
Citing correcting valuations, KIA announced pausing its startup fund. “In PE/VC investment, vintage of the fund i.e. the time to start deploying capital is very important. Presently, valuations are correcting, hence it is prudent for the FOF to defer investing and catch a better vintage of funds. With this view, we have taken the call to postpone the PE/VC FOF," said a spokesperson at Kotak Investment Advisors Limited.