A few months ago, ‘The Soup Bowl’ could sense that it was time to take the plunge. The business had caught on, but there wasn’t anyone waiting in the wings to bankroll the country’s first soup chain. Funds came from an unlikely quarter.
A well-heeled investor, better known as HNI in the world of wealth management, was willing to write a cheque for 2 crore. The person, who had plans to park a slice of his personal investment in a start-up, liked Soup Bowl after visiting one of its outlets.
Soup Bowl had no qualms in offering the investor a significant minority interest: it was an opportunity for the firm to grow beyond Mumbai. While the story comes across as a typical breakthrough moment for a small business, it also speaks about the appetite of wealthy investors to part-own little-known start-ups.
The market for such deals is yet to reach a critical mass and transactions are often struck through an acquaintance or family broker who puts the word around. Occasionally, investment banking arms of brokerages tap HNI clients to sell a start-up idea.
But wealth managers and private bankers agree that more and more wealthy investors and families are approaching them for buying stakes in unlisted entities and start-ups. Some are drawn by the exotic element that a start-up can add to their portfolios. For most, it’s a new bet that they hope can cover the losses in their bag of stocks, mutual funds and fancy debentures.
“There is an increasing demand from sophisticated clients looking at opportunities, where they can directly invest in unlisted companies,” says Rajesh Saluja, managing director and chief executive officer, ASK Wealth Managers.
Deal sizes could be anywhere between 2 crore and 10 crore; terms and conditions vary from deal to deal; and the details are fine-tuned by the entrepreneur and the investor across the table.
A choppy market and growing number of millionaires will only fuel the demand for new investment windows such as start-ups. According to a December 2011 report by Karvy Private Wealth, total individual wealth in India is expected to nearly triple to 249 lakh crore by 2016 from the current 86.5 lakh crore.
INVESTING IN NICHE SECTORS
Putting in a few crores is no big deal for serious investors if the business model attracts them.
A few years ago, an HNI family from Delhi invested 4 crore in the Bengaluru-based retailer Inventus, which used the money to set up more stores and launch an e-commerce platform.
“There is demand from HNI family offices for such deals in sunrise sectors,” says Anshu Kapoor, who heads private wealth management in Edelweiss Capital. But even old economy companies do attract investors – just as an unlisted chemical company in western India, with a turnover of 25 crore, discovered two years ago when a Mumbai-based investor picked up 20% stake in it.
According to Mumbai-based wealth manager Richa Karpe, often there is a passion to invest in niche or high-growth segments such as sports, entertainment, renewable energy, a niche restaurant and so on. “HNI families believe start-ups are good long-term bets, where they can get multi-bagger returns. Many families in the West have made money backing such start-ups – something that is luring Indian HNIs,” she says.
Smart HNIs look for small firms with businesses that are scalable and sectors such as education, hospitality and e-commerce fascinate them.
Organisations with wealth management as well as investment banking divisions often play a role in helping clients execute such deals. “Many a time such deals are struck within the bank itself between two clients,” says Vishal Kapoor, the wealth management head at Standard Chartered Bank.
But such deals have their risks. Besides taking a long time to generate good returns, they have to navigate risks, fish for funds and battle nasty surprises from bigger players.
Typically, such investments are advised for a period of 5-7 years, and exits could be either by selling to a bigger PE fund or through stock exchange listing. Wealth managers, with no investment banking arm to back up, are reluctant to work on such deals.
Reasons: such deals aren’t easy to spot, wealth managers lack the skill to monitor the company after the deal is closed, and lastly, there is no standard fee that can be charged for such transactions. “Many times we merely introduce the company to our HNI client and leave the finer negotiations to them,” says Karan Bhagat, CEO at IIFL Private Wealth.
Traditionally, HNIs have taken indirect exposure to unlisted companies and start-ups by investing in private equity and venture capital funds. But in such investments, they have no direct control over the investee companies. When these funds fail to generate the expected return, investors look for greener pastures and direct stakes.
Since most investors either head a business or run closely-held enterprises, there is a natural tendency to pick start-ups where they have some knowledge of the product line and industry. “HNIs scout for investments in sectors they understand. At times, along with capital, they provide managerial inputs,” says AV Srikanth, executive director, Anand Rathi Wealth Managers.
Start-ups could draw many rich investors who have preferred sitting on cash in the past one year and are now looking for investments. “They can devote time and managerial inputs to start-ups and are keen to invest,” says Ashish Khetan, head of family office and advisory business at Kotak Wealth Management.