Several noted VC funds in India will be close to their expiry dates in 2025 and 2026, which makes SEBI’s updated rules for liquidation all the more pertinent, and more so because it mandates performance reporting for unliquidated assets
In recent times, SEBI has stepped up its scrutiny of AIFs that are seeking to extend tenures, because in many cases these funds were simply buying time and did not have a plan to liquidate their funds
While SEBI has looked to clean up the fluff from the frothy AIF market, the regulations have second and third order impacts, with potential for conflicts between investors and founders as well as value erosion
When we looked at the state of exits for venture capital funds in India last week, several fund managers — former and active — texted me about how many of these funds on the exit path are acting out of desperation. To add context, my sources pointed to SEBI’s changes released in April around the one-year extension for funds to begin their liquidation process.“Nobody knows whether the new regulations are better for funds because they are new to everyone. Even experienced fund managers don’t yet know whether the new regulations are better since the adoption is ongoing,” according to a veteran fund manager who has invested in startups through AIFs since 2013.Some of those secondaries in 2021 came at a discount even though the market had high liquidity, and now, with the future uncertain, those in the market for secondaries in 2024 enjoy the advantage of getting an even bigger discount. “In the VC world, this discount is called the liquidity discount. Even in good times when the market is pretty good, it is generally considered to be 10%. If the asset does not have super demand, the secondary buyer will always get a discount and this depends on the asset.”“There is no doubt that this is a buyer’s market. Many VCs are desperate to exit their funds and show some positive track record in terms of LP returns. For many of the professional fund managers, this is a litmus test and therefore some of them might pressurise founders to execute deals quickly,” the VC firm founder quoted above added.“Founders have to accept that if there was a time for primary rounds and capital infusion, it will be followed by a time for secondaries and exits. This is part and parcel of venture investing, and there is no doubt that some founders may feel shortchanged, but that’s the reality they have to accept,” said a third Bengaluru-based fund manager.
The extension itself is not a new development, as funds have typically received a 1+1 year extension for some time now. However, SEBI also changed its rules related to liquidation in April this year after several limited partners approached the regulator about funds delaying fund closures beyond these extensions.