Private equity and venture capital firms are eyeing the potential slice of Rs 50,000-crore fund of funds for equity investments into micro, small and medium enterprises (MSMEs) with “growth potential” announced by the finance minister Nirmala Sitharaman on Wednesday.
While the government is expected to contribute Rs 10,000 crore in the fund, another Rs 40,000 crore is expected to be raised from external parties.
This is a model similar to the startup fund of funds run by Sidbi, which has been able to leverage Rs 3,798 crore of government contribution to raise 5-6 times the amount at close to Rs 20,000 crore. This has been done through the contribution of 10-20% to the corpus raised by dozens of independent venture capital funds, which then mobilise more money from other backers and invest in startups.
Government is looking to repeat the success of that fund for MSMEs. “For that to happen, family offices, insurance companies, provident funds and various other pools of capital will need to participate. We are keen to work closely with the government to ensure this happens, as soon as possible,” said Rehan Yar Khan, co-chair, Venture Capital Council, IVCA & managing partner, Orios Venture Partners.
As a part of the fund of funds initiative, the government also plans to encourage MSMEs to be listed on the main board of stock exchanges. The government has announced a change in the definition of MSMEs, which include companies that have a turnover of upto Rs 100 crore and capital investment of up to Rs 20 crore.
“This money will end up in the hands of younger startups that are below the revenue threshold as they are service MSMEs effectively, and will have to register that way,” added Khan, saying that overseas capital for startups is likely to remain slow over the next 1-2 years.
But if the fund remains limited to just SMEs and does not include startups, it will be hard to leverage external investors, added other venture capital investors tracking the development.
The fund had been in the works before Covid-19 pandemic, but many question if it will be able to leverage capital if the definition excludes startups. “If equity investment in SMEs was an attractive asset class then there would be several funds dedicated to it already,” said a VC fund manager briefed on the matter.