A blessing or a curse for VCs?
Thanks to the economic optimism ushered in by the election of pro-business Prime Minister Narendra Modi, India turned out to be the star of the hedge fund industry in 2014, boasting both the world’s best-performing hedge fund and its winningest hedge fund strategy.
Mumbai-based Alchemy Capital Management, a $53 million long-short equity fund, topped the hedge fund charts with an eye-popping 63% gain through November. It was also one of 65 India-focused hedge funds — managing a total of $3 billion in assets – generating a world-best average return of 38.95%. For the same 11-month period, the global hedge fund industry average was up only 4.37% while the S&P 500 gained almost 12%.
Not only did India top the hedge fund rankings last year, but it also became a mecca for global hedge funds seeking outsize returns from venture capital investments (so-called ‘cross-over funds’). India is considered one of the few emerging markets with real growth prospects, while most of the rest of the world is slowing down.
To date, U.S. and Chinese hedge funds have focused their Indian VC investments on consumer internet companies, hoping to cultivate another Facebook, Alibaba or Twitter. There is already one success story in an e-commerce company called Flipkart whose business mirrors Amazon’s. Founded in 2007, Flipkart attracted a $10 million investment in 2010 from U.S. hedge fund Tiger Global which last year led a $1 billion round for the company. Flipkart now has over 15,000 employees, $1 billion in annual sales and a valuation of $11 billion, higher than many of India’s top business groups.
For venture capitalists with an eye on India, the recent hedge fund interest in India has proved to be a two-edged sword. On the one hand, new hedge fund money is a welcome addition to the Indian capital markets for VCs looking to exit their existing portfolio investments. On the other hand, however, VCs hoping to source promising early-stage investments in India are now finding themselves edged out of deals by hedge funds with bigger wallets (since VCs generally limit their individual investments to no more than a tenth of their funds). Last year, hedge funds poured $525 million into 18 Indian start-ups, almost quadrupling India’s total VC haul in 2013.