Kotak defers startup fund on weak market

Kotak Investment Advisors Ltd (KIAL) said it has deferred its Fund of Fund (FoF) that was launched last year to invest primarily in private equity (PE) and venture capital (VC) funds.

“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 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 for KIAL.

The company didn’t respond to queries emailed separately on whether the fund will start returning money it has raised so far back to investors.

However, a person with knowledge of the development said that KIAL has “begun conversations with investors (limited partners) and will soon be returning money it has drawn down,” the person said.

Kotak India Alternate Allocation Fund was set up as an alternative investment fund under Sebi regulations last year. The fund aimed to raise ₹1,500 crore, including a greenshoe option of ₹750 crore. The fund’s objective was to diversify across PE/VC funds in sectors such as consumer, technology, healthcare, and financials, as well as across multiple stages, from early stage to growth stage and late stage across different vintages. ‘Vintage’ refers to first year the fund starts investing in companies.The fund was launched amid strong interest from high net worth individuals (HNIs) in the last few years to invest in the PE space. For a fund that has a fixed life cycle, there is a defined deployment period. If due to market conditions, the general partner (GP) isn’t able to deploy capital, they can return it along with fee earned so far.

A second person said in case of Kotak, though it has been a year since the fund was launched, the firm decided to return capital from the FoF following poor market conditions and inability to deploy it.

By introducing a FoF, KIAL 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 take an informed choice. Through Kotak’s Fund of Funds we intend to provide investors access to 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 last year.

The venture capital or private markets, private debt market space has matured in recent years. In 2020-2021, the private markets witnessed exits through secondary markets or through public offerings, which resulted in a lot of Indian HNIs seeing this as a viable proposition for investments.

However, given the global macro-economic headwinds in the last year or so, there has been a ‘funding winter’ for startups, which has reduced capital inflows into the startup ecosystem. Fund managers have been slow to launch new funds in this new environment as limited partners or LPs have largely paused fresh investments.