A Delhi-based private equity fund manager recently met the owner of an office automation firm. With an annual revenue of Rs 40 crore, the firm was plotting a high-growth graph. The story was exciting enough for the PE executive, but the deal fell through when the company said it needed only Rs 5 crore.
The executive from the PE fund that managed $200 million (Rs976 crore) says he was not interested in funding such a small amount. His investment sweet spot was $10-25 million. The executive had neither the appetite nor the time to nurture a $1 million investment. His rationale was that one cannot earn much on $1 million even with a five-fold return.
The disinterest of big funds in small-ticket investments (primarily in non-technology companies) is presenting an opportunity for newbie funds such as Song Investment Advisors and Epiphany Ventures that are eyeing this space. Song is a $17 million fund backed by search giant Google Inc., Soros Economic Development Fund and Omidyar Network, while the $25 million Epiphany is backed by steel magnate L.N. Mittal and other non-resident Indians.
“Firms like ours can be a feeder to the funds which want to put $10-15 million to work,” said Vishal Vasishth, founder and managing director of Song Investment Advisors. Vasishth was most recently the founder and chief executive officer of Clean Partners, a business advisory and investment firm in the US.
Song, for instance, plans to invest $0.5-3 million each in small and medium enterprises, or SMEs, operating in sectors such as healthcare, education, waste water management, low cost housing, basic utilities, microfinance, rural energy, rural telecom and business services. The fund is housed in Hyderabad’s Indian School of Business (ISB) campus. ISB’s Centre for Emerging Markets Solutions (CEMS) is the fund’s local strategic partner.
Epiphany, too, is targeting investing $0.5-3 million in early stage businesses in education, clean technology and those focusing on inclusive growth and not necessarily pure technology plays. “Only a handful of funds are fulfilling this need,” said Gaurav Saraf, director, Epiphany Ventures.
Traditional SME-focused PE firms such as BTS India Advisors, SIDBI Venture Capital Ltd, Aureos India and Zephyr Peacock India Fund invest $5-20 million. There are also firms such as Seed Fund, Ojas Venture Partners, and Accel India (formerly Erasmic Venture Fund) which provide $0.5-2 million of funding, but they are mainly focused on consumer Internet, mobile and technology space.
So that leaves a widening funding gap for emerging non-tech companies that need equity capital in smaller doses.
Song’s strategy of looking at sectors beyond technology may be ideal in the Indian context. “For India to grow at 6%-7%, sectors focusing on inclusive growth are critical. We are going to focus our energies on them,” said Vasishth.
Song is not chasing business plans, but firms clocking revenues of Rs 5-10 crore and in the non-tech space. These companies “have a very hard time” raising equity capital, he reckons. Song is already at a term sheet stage with one firm. “We are seeing interesting companies in the education training space,” he adds.
The growth of funds targeting small-ticket investments is linked to the kind of corpus they manage. As the corpus grows, the investment range tends to expand.
This is because funds with a larger corpus lack the bandwidth to manage too many small investments. They instead prefer to enlarge their investment range across fewer deals.
For instance, Delhi-based Avigo Capital Partners invested $1 million in a company when it was managing its first fund of $5 million. When it raised its second fund of $125 million in 2006, the investment range went up to $5-7 million. Avigo, which has made its first close of its third fund of $250 million at $150 million, invests $7-10 million or more.
For funds such as Song and Epiphany, the challenge would be to remain in the small-ticket investment space even if their corpus expands.