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Beyond The Mainstream Universe - Amit Shah

Private equity and venture capital investments have witnessed a significant surge in activity over the last decade. Unlike in the olden days when private equity funds invested largely in late stage and growth stage rounds, funds today are increasingly backing companies during its initial phase and deploying capital in early-stage deals. The leading sectors where private equity investors have continued to deploy heavily include consumer, information technology, banking and financial services and healthcare.

The alternative investment funds (AIFs) was introduced as an investment vehicle in 2012. Since then, they have spurred investment growth in this space through creation of new asset classes and investment strategies. Registered under the Securities and Exchange Board of India, AIFs have opened new doors for Indian investors beyond the mainstream investment universe. It has provided a vital boost to the developing Indian economic and investment landscape. Venture capital, hedge funds and pre-initial public offering investments can bolster a portfolio by mitigating risks and spurring returns. While AIFs can also invest in listed equities, the structure allows for investing in the above strategies, which are otherwise unavailable under the traditional mutual fund platform.

Recognising AIFs' potential for economic growth, the government had announced a slew of benefits: it has lowered capital gains tax for nonresident investors to 10 per cent, provided a tax pass in Category I and II AIFs and has allowed foreign investors to invest in India without government approval in Category I and II AIFs.

The promising growth in private equity and venture capital investments through AIFs can be evidenced from the year-on-year growth in Category I and Category IIAIF commitments raised over the years.

As private equity funds continue to invest capital in India, more investments are being channelised towards creating platform companies. In 2017, India led the fundraising environment in the Asia Pacific region, which managed to raise $5.7 billion, or roughly 48 per cent of all fundraising activity in the region. For wealth creation, some of the largest global pension funds, global private equity funds and homegrown funds are focusing on creating platform companies in India, as it allows them to build businesses at a cheaper capital cost as compared to acquiring assets in today's mark to market values.

Private equity investing has also moved from large businesses and established corporations to supporting professional entrepreneurs. Equity investors are now warming up to New Age companies launched by professional entrepreneurs and helping them achieve economies of size and scale.

Although private equity-backed professional entrepreneurship found its roots in India in technology and software services businesses in the early 2000s, the story is not the same anymore. Over the last decade, investments in seed and angel rounds have increased manifold, indicating the growing number of equity-backed entrepreneurs. Apart from early-stage deals, the venture capital market is predominantly made up of first round transactions and follow-on transactions in startups. As a result, global private equity funds and homegrown fund managers are deploying capital towards entrepreneurs, a trend which is expected to pick up over the next few years, as it not only allows more control in the transaction but also charts similar growth goals with the newly established firm.

The author is Chief Executive Officer, IIFL Asset Management Business.

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