Kotak Investment Advisors Defers PE, VC FoF Due to Poor Market Conditions

Kotak Investment Advisors Ltd (KIAL) has announced that it is deferring its Fund of Fund (FoF), which was launched last year to primarily invest in private equity (PE) and venture capital (VC) funds. The spokesperson for KIAL has stated that the “vintage” of the fund, or the time to start deploying capital, is crucial in PE or VC investment and presently, valuations are correcting, so it is wise for the FoF to postpone investing and catch a better vintage of funds.

The company reportedly did not respond to queries about whether the fund will start returning money it has raised so far back to investors. However, a person with knowledge of the development has revealed that KIAL has begun conversations with investors and will soon be returning the money it has drawn down, the Mint reported.

The Kotak India Alternate Allocation Fund was set up as an alternative investment fund under Securities and Exchange Board of India (SEBI) regulations last year. The fund aimed to raise  Rs 1,500 crore, including a greenshoe option of Rs 750 crore, with an objective to diversify across PE/VC funds in sectors such as consumer, technology, healthcare and financials, across multiple stages, from early stage to growth stage and late stage across different vintages. 

The fund was launched amid strong interest from high-net-worth individuals (HNIs) in the last few years to invest in the PE space.

By introducing an FoF, KIAL aimed to solve the problem of concentration risk in VC investing due to high minimum investment requirements. The lack of knowledge and information availability in this asset class makes it difficult to take an informed choice. 

Through Kotak’s Fund of Funds, the company intends to provide investors access to multiple funds as well as leverage its institutional diligence with peer benchmarking data available, coupled with institutional monitoring of long-tenure funds, according to Nidhi Chawla, Fund Manager, Kotak India Alternate Allocation Fund.

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 many 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.

In the 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. The FoF has been deferred due to the correction of valuations, making it prudent to postpone investing to catch a better vintage of funds. It is uncertain whether the company will start returning money it has raised so far back to investors.