venture capital: to stimulate funding for startups, the government offers incentives to venture capital and private equity funds
The Startup Fund of Funds (FFS) was introduced in 2016, to contribute to various alternative investment funds (AIFs) registered with the capital market regulator Sebi.
The FFS, managed by the state-controlled Small Industries Development Bank of India (Sidbi), has invested more than Rs 9,400 crore in 86 AIFs (the regulatory term for PE and VC funds).
Sidbi is the largest limited partner or investor in the country contributing capital to venture capital and private equity funds.
In a letter dated April 29, 2022, Sidbi told AIFs it would allow “accelerated drawdowns” of money committed by the FFS while fund managers earn an internal rate of return (IRR) above the rate of hurdle – the minimum return a fund has to point before profits can be shared between investors and the fund manager.
“These are concrete steps to ensure that FFS investments in qualifying Indian AIFs can be on better commercial terms in terms of management fees, interest carried for qualified and successful fund managers, while offering more flexibility to fund managers in their time. – current operations. Sidbimanaged FFS has been one of the largest domestic institutional investors in Indian venture capital funds and the liberalization of many existing onerous conditions in investment agreements will help bring these conditions into line with those prevailing globally,” said Tejesh Chitlangi, Senior Partner, IC Universal Legal.
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Since OFIs are often slow to raise capital from other investors, a faster withdrawal of funds committed by the FFS will ensure that the trading capacity of OFIs is not hampered.
The “carry” or profit share (once the fund’s IRR crosses the minimum rate) is usually in an 80:20 ratio, with 20% going to the manager. The FFS is now ready to pass on 25% of the additional returns (beyond the new IRR) if the IRR exceeds 25%. The carry portion would be 30% (of the incremental return) if the fund achieves an IRR above 30%.
FFS, per Sidbi’s letter, will consider paying higher management fees after taking an overview of total spend, and if a fund is female-led, focus on female-led startups , priority areas, agro-rural sector, finance and inclusion and is committed to investing in level 2 and -3 centers. The FFS is also open for investment in funds above Rs 1,000 crore corpus as long as the investment manager of a fund is a domestic entity, key persons or managers have managed funds in which Sidbi is was engaged in the past, and that the exposure is capped at the same level as that applicable for a fund with a corpus of Rs 1,000 crore.