India: A Growing Market for Venture Debt Investors Ashton Global

India: A Growing Market for Venture Debt Investors

Institutional investors have shown confidence in India because of its rapidly growing economy and democratic government that has embraced reforms. In addition, the crackdown in China against companies with large numbers of US investors has given India a relatively more attractive investment profile. In fact, India's stock market was the best performing in the world in 2021.

An Overview of Venture Debt in India

While venture debt is an established concept in Silicon Valley, it has also recently become a viable option for early-stage companies in India. Venture debt involves a financier lending money directly to an early-stage venture company for growth capital.

Entrepreneurs can benefit from venture debt by reducing the dilution of selling equity to raise cash. Venture debt can also extend the timeline between equity fundraising. This allows the founders to maintain control of the company while using venture debt for working capital and bridge financing.

Venture debt transactions can also provide tax benefits that lower the cost of capital. Generally, debt investments can be executed faster than equity investments because of a shorter due diligence process. 

Strong Fundamentals for Venture Debt in India

India's financial services sector creates strong fundamentals for venture debt. The appetite for "bankable" companies to have historical financial statements, operating history, and hard collateral often makes traditional forms of lending nearly impossible. In 2021 venture debt funds in India raised $85 million, a 37% increase from the $62 million raised in 2020.

Venture debt allows a financier to structure a private lending transaction with the company directly. Investors seek to structure transactions with limited downside, and the possibility to convert some of the debt to equity at a future date (known as an "equity kicker").

The most common transactions in India's venture debt market are revolving credit facilities, revenue-linked loans with a cash sweep, accounts receivables factoring, and equipment and contract financing. The loans are typically short-term, with returns ranging from 10% to 18% depending on the sector and the borrower.

Diversification and Due Diligence are Two Key Drivers of Success

Family offices and hedge funds are best suited to invest in India's venture debt market. The ability to underwrite and structure unique transactions quickly makes family offices and hedge funds a good fit for making loans to venture companies in emerging markets.

The relatively smaller "check size" in India enables an investor to make multiple loans, diversifying across borrowers and sectors, without having a substantial amount of capital at risk. The investor also has the option to convert a portion of the debt to equity, providing an attractive return profile for hedge funds and family offices.

However, it is vital to perform robust and thorough due diligence when lending to early-stage companies. Background checks, UCC verifications, bank account tracing, as well as establishing "control accounts" and cash sweeps to direct disbursements and payments are key steps in our due diligence process.

Ashton Global helps institutional investors identify funds and direct transactions focused on venture capital in India. Contact us today at 212 514 8953 or email to speak with a consultant. Click here to see if you are a good fit for the emerging manager program.