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Syndicated deals by PEs to lower risk

Syndication might have been an oft-used investment strategy for large deals, but it is now finding its way into small and mid-sized transactions too as venture capital (VC) funds try to diversify and de-risk their portfolios.

Several recent transactions with a value up to Rs 75 crore have seen participation from two-three investors.

For instance, Aavishkar Goodwell co-invested $10 million (around Rs 47 crore) in Basix along with Lok Capital and others.

Similarly, JustDial received $16 million (around Rs 74 crore) from three investors — SAIF Capital, Sequoia Capital India and Tiger Capital.

ePlanet Advisors recently invested $16 million in Continental Warehousing Nhava Sheva with Aureos India.

Loylty Rewardz Mgmt, a loyalty and rewards management company, received $1.25 million (around Rs 6 crore) as first round of funding from Ventureast with Argonaut as a co-investor.

Some VCs such as Mayfield Advisors typically follow a co-investor model. It has co-invested $9 million (around Rs 41 crore) in PayMate, a mobile payment company. The fund has also invested $9 million in Geodesik Techiniques and $17 million (over Rs 78 crore) in Satya Paul as a co-investor.

IDG Ventures recently invested $3 million (around Rs 14 crore) in Apalya Technologies, a Hyderabad-based mobile TV company, along with Qualcomm Ventures. Sudhir Sethi, founder, chairman and managing director of IDG Ventures, said that co-investments added value and increased the pool of available capital.

“Co-investments in smaller deals gained momentum recently as VCs are using this route to de-risk their investments. It adds tremendous value and gives confidence to investors. The pool of available capital is also more as you grow,” he said.

Of the 10 investments made by IDG Ventures, it was co-investor in seven instances.

IFCI Ventures, which did its first syndicated deal recently, said the strategy would help in diversifying the portfolio and the resultant lowering of risk. “No one wants to put in a lot of money in a single project. Everyone is looking at diversifying their portfolios and are investing in 20 companies instead of eight-nine earlier,” said IFCI Ventures Managing Director BN Nayak.

Along with IDFC Project Equity, IFCI Ventures has co-invested $16 million in Sabarmati Gas.

In addition to raising funds easily in the second round, the resources used for carrying out due-diligence and monitoring are also shared among co-investors.

“Due to fund constraints, many funds are unable to commit beyond a maximum limit. With two or more funds in place, companies can raise follow-on investments quickly without resorting to external rounds. The resources used pre- and post-investment are also shared among investors,” said e-Planet Managing Director Chandrasekar Kandasamy.

Unlike earlier, when syndication happened only in the second round with higher capital requirement, now even start-ups go for it in the very first round, called Series A.

The syndication arrangement takes place between financial and strategic investors. While financial investors are involved in deploying funds, strategic investors add value to the venture. It also made it imperative for the coming together of like-minded co-investors so that the company could become more focussed, said an executive of a VC firm.

“Deal sizes of around $10-20 million are seeing investments from two-three VC funds. Now syndicated deals do not only mean large ones,” said Venture Intelligence Chief Executive Officer Arun Natarajan.

Source: Business Standard

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