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Tue, 25 Jan 2022 | The Ken
IIFL AMC’s $670 mn fund and the art of riding the tech investment wave

IIFL AMC’s $670 mn fund and the art of riding the tech investment wave

Chetan Naik has lofty ambitions for the tech fund he’s managing, run by IIFL Asset Management Company (AMC). “We want to be at the intersection of the best of the VC world and growth-stage PE funding,” says Naik

He’s sitting in a conference room named after Benjamin Graham, considered the father of value investing, at the IIFL AMC headquarters in central Mumbai for the interview with The Ken. (There are also rooms carrying the names of other legendary investors such as George Soros, Bill Gross, and Ray Dalio.)

“We want to invest in hyper-growth companies but we also look at strong unit economics,” he adds. 

Naik’s statement follows a stellar year for IIFL. The company made a splash in 2021 with its Rs 5,000 crore ($670 million) late-stage and pre-initial public offering (IPO) tech fund. 

Set up in late 2020, the fund has deployed 60% of its corpus since January 2021. In its portfolio are 17 companies, including online insurance aggregator PolicyBazaar, food delivery platform Swiggy, edtech giant Byju’s, and online meat delivery company Licious. 

It’s not entirely unexpected considering that 2021 saw fundraising, both in frequency and size, reach fever pitch. Over $50 billion in venture capital (VC) and private equity (PE) investments went to Indian companies, the largest ever, according to data provider Tracxn. 

But that’s also what makes IIFL AMC’s ascent to the cap table of marquee startups an unlikely one. Almost 80% of 2021’s investments came from late-stage deals (Series C and above), a category in which usual suspects such as Sequoia and Tiger Global often make headlines. IIFL, on the other hand, is better known for its wealth management, IIFL, on the other hand, is better known for its wealth management, shadow banking, and broking businesses. 

Naik, who’s been a PE investor since 2015, chalks this up partly to his previous experience. During his earlier stint at TVS Capital Funds, Naik invested across stages and businesses such as beauty e-tailer Nykaa and power trading platform Indian Energy Exchange. Observing how Nykaa was scaled while also being “very capital-efficient” also came in handy, says Naik. 

The result of that approach is the bevy of bets in his current fund. “The kind of deals Chetan has done… I was telling him a few days ago, ‘Wherever you are doing a deal, take some money from me also’,” says Vivek Gupta, co-founder of Licious. Gupta adds that he isn’t joking. 

IIFL AMC is no stranger to backing startups. Since 2015, it has picked up stakes in companies such as cloud kitchen brand EatClub Brands (formerly Box8), conversational artificial intelligence platform Uniphore, and fashion e-tailer Fynd, through early-stage funds. But these vehicles are one-tenth the size of the late-stage fund. 

The tech fund’s deals range between $20 million and $50 million—hardly a headturner at a time when cheques 4X as large are being handed out. But it speaks to a broader trend in which newer kinds of investors want to partake in the tech investing euphoria, helped in no small measure by the blockbuster listings of Swiggy’s rival Zomato, and Nykaa, among others. 

These funds are all primarily driven by demand from the firms’ wealth management clients, says a seasoned fund manager. “The idea is to raise money fast from clients and deploy it quickly. It’s not smart money.” The investor and others The Ken spoke to requested anonymity since they did not want to be publicly seen talking about these funds. 

The real test for these firms is when the rising tide ebbs. “Many of these new-age players who are used to a normal distribution in returns will be forced to rethink their strategy and may recalibrate their expectations,” says an early-stage investor. 

By normal distribution, they are referring to the returns being more evenly spread across a portfolio of, say, listed companies. But in venture investing, a few companies account for most of the fund’s returns—called the Power Law—even if it’s truer of early-stage than late-stage deals. 

Naik is not overly worried, though, citing the kind of companies he is backing.

Casting a wide net

IIFL AMC has a seemingly large catchment, thanks to both its sector-agnostic approach and how it defines its bets. 

  • Winner-takes-all businesses or even duopolies (PolicyBazaar, Swiggy)
  • Leaders within verticals (Licious, upskilling edtech startup UpGrad)
  • Companies with a strong tech moat and a large addressable market (SaaS startup Exotel, B2B manufacturing platform Zetwerk)

“We have stayed away from pure-play payments because of the competitive intensity in the space,” says Naik. 

Even as it stays away from crowded segments, another of IIFL’s criteria is a clear path to profitability in three years. 

IIFL AMC’s $670 mn fund and the art of riding the tech investment wave

For instance, Swiggy, in which IIFL invested through a secondary deal a year ago, expects food delivery to be profitable in two to three years. And there are those, such as Exotel, that are already in the black. Exotel posted a net profit of Rs 11 crore ($1.5 million) on revenue of over Rs 120 crore ($16 million) in the year ended March 2021. 

“PE guys are more risk-averse and don’t want to invest in high-burn models,” says an investor, who’s invested in one of IIFL’s portfolio companies. “I totally get it if they want to invest in tech and still play it safe.

Despite backing some companies early on, IIFL’s legacy is more PE than VC. 

IIFL’s relative prudence may have been partly responsible for clinching an investment in HomeLane, an online home interiors company. “They came in with a very clear conviction about why they want to be in HomeLane,” says chief executive Srikanth Iyer. “If you have to choose between growth and profitability, I know what 80% of investors will choose.” 

IIFL was not the first to commit to investing in HomeLane in its Series E round. But it made up for that by going from the introductory conversation to a term sheet in just three weeks, says Iyer. “In my experience, the median time for late-stage investors is eight weeks.” IIFL ended up leading the $50 million round, which also saw Oman India Joint Venture Fund and Stride Ventures participating. 

With Licious, Naik was in touch with the founders six months before IIFL led a $52 million funding round in October, according to Gupta. 

There may be a frenzy among investors over companies going public. And while Naik says he prefers a post-listing exit in most of his companies, he is not putting all his eggs in that one basket. Roughly 85% of his fund’s investments are in companies that are at least two years from an IPO. 

The tech fund has already made a couple of partial exits, with 2X returns. 

IIFL AMC’s $670 mn fund and the art of riding the tech investment wave

The appeal of IIFL, however, is quite different. “They have been very strong on the demand side with their wealth management business,” says HomeLane’s Iyer, referring to IIFL’s ability to mop up funds. And the pandemic was a time when the ultra-rich were not spending on things they otherwise would, like expensive vacations, he adds.

Covid aside, there is a broader shift in the VC funding ecosystem, where 80% of the capital used to come from the US, says Gupta, who spent a decade at the India-focussed but Mauritius-based Helion Ventures before starting Licious in 2015. “Now with the ecosystem maturing, a lot of Indian capital has started coming in… And in that shift, the IIFLs of the world sit at the top as advisors to family offices.”

The investment vehicles of IIFL, are category-II alternative investment funds, which require a minimum investment of Rs 1 crore (~$134,000). And these firms usually target high-net-worth individuals and family offices.

In addition to the access they have to capital, Naik—who joined IIFL in 2019—says the firm has managed to tap into connections with founders that pre-date the late-stage fund. “I have known Swiggy since their Series B round (in 2015).” IIFL’s tech investments are handled by a four-member group drawn from investment banking and the Big Four of accounting. Its overall PE arm is a team of 10. 

While IIFL has used its early-stage funds to both invest directly in companies and in VC firms, its tech fund is dedicated to the latter.  

With Exotel and Licious, we came in first,” says Naik. However, given the size of late-stage rounds and the limitations IIFL has in terms of how big a cheque it can write, more often than not, it’s unlikely to go it alone. 

Late-stage investors may be happy with 2-3X returns in three years, says the investor in an IIFL portfolio company mentioned above. But such are the times that IIFL is already seeing those multiples in its portfolio.

IIFL invested in Pine Labs at a valuation of roughly $3 billion in July, and now the company is reportedly planning an IPO in the US at $5.5-7 billion. It bought shares in PolicyBazaar through a secondary deal a year ago at a valuation of $2.8 billion. Now the company’s market cap is $5.2 billion, even if its shares have slid a third since its listing in November.  

These are paper gains, though. The IIFL tech fund’s scorecard will have to wait till its first few exits. Naik may not have as long as a typical PE vehicle though—the tech fund’s term is limited to six years, compared to a PE fund’s 10 years or so. Still, that’s long enough for a lot of his investee companies to go public. 

Regardless of the fund’s fate, asset managers’ newfound love for tech ventures is anything but transitory. As Licious’ Gupta puts it, “This is not money you can ignore anymore.”