India direct secondaries: Footprint freefall

When Indian personal loans start-up KreditBee raised $75 million for its Series C round last month, the India-China border skirmishes of 2020 were still resonating loudly. New regulations supposedly prompted by deteriorating bilateral ties and requiring Chinese investors to clear extra approvals hurdles meant the likes of Shunwei Capital, Kunlun Capital, and Source Code Capital were unlikely to meet the timeline to re-up. They were offered secondary exits instead.

The episode was part of a broader investor base rethink by KreditBee’s parent, Finnov, which has reportedly cut back its Chinese backing from 40% to 10%, with electronics giant Xiaomi making a full exit. In the months since tensions between the two countries climaxed – arguably with the death of 20 Indian soldiers in June 2020 – moves of a similar nature have formed a distinct pattern.

Standout examples include the last two rounds for delivery app Zomato, which raised a combined $355 million in September and December but conspicuously lacked participation from longstanding investor Alibaba Group. Alibaba was also the largest investor in e-commerce delivery start-up Xpressbees until Investcorp, Norwest Venture Partners, and Gaja Capital led a $110 million round without the Chinese giant in December.

Meanwhile, the ecosystem is becoming increasingly vocal about its motives and intentions. Yashish Dahiya, CEO of insurance aggregator PolicyBazaar, publicly implemented plans to remove Tencent Holdings from its cap table last year saying that China had “not played by the rules” regarding market access. Last month, microblogging app Koo highlighted with some fanfare the exit of Shunwei, its lead Series A backer, to a now proudly 100% Indian investor base.

“Companies in the consumer space in particular don’t want to be seen as funded by Chinese money because it doesn’t play well with their audience on account of negative public sentiment.,” observes Ashish Sharma, CEO of InnoVen Capital India, an investor in Xpressbees and KreditBee’s student credit platform KrazyBee.

“Many founders are actively looking to reduce the Chinese shareholding, either through secondaries or by raising more money, where the Chinese investors don’t participate. I hope that that relations between the two countries improve, but for now, most investors and founders don’t see any significant change in the situation.”

Nuanced opportunities

The question remains to what extent this phenomenon will drive single-asset secondary deal flow. Total Chinese investment in Indian start-ups is estimated to be around $4 billion, but whether this translates into secondary activity will depend on the viability of the companies involved and the dynamics of any given funding round.

Investors in the country suggest there could around $500 million in playable Chinese divestment opportunities currently. Most will play out in the years to come, including some 6-7 China-backed start-ups seen as having credible paths to public markets.

In some instances, Chinese investors unable to re-up will choose not to divest despite the prevailing pressures, sensing a bigger payoff down the track. In other cases, especially for less mature companies, the timing will not be right for capital raising. Most of the secondaries action will likely be in later-stage companies raising oversubscribed rounds.

“You have to be cognizant of the fact that Chinese investments into India only started picking up 3-4 years ago. So, we are looking at single-asset secondary opportunities where Chinese investors are looking to sell, but those deals would only be 10-20% of our pipeline in India,” says Amit Gupta, a founding partner at NewQuest Capital Partners, a direct secondaries specialist. The firm sees most of its deal flow in single-asset transactions, with India representing 35-40% of the overall business.

“I think this will be a temporary phenomenon in India-China relations and will be resolved in the near future. In the meantime, one of the key considerations when looking at secondary opportunities is whether the Chinese shareholders constitute substantial equity in the target company and whether the sector in which the company operates has any restrictions. If that’s the case, stakeholders want to make sure that shareholding is minimized.”

It's possible that secondaries driven by Chinese divestments will be a locals-only game in India, with few deals large enough to justify a traditional single-asset price discovery process or attract the interest of global secondary players. But that remains to be seen. Greenhill, for example, hasn’t seen much activity of this nature to date, but neither has it ruled out the opportunity set. The firm, which has advised on transactions with less than $5 million of India exposure, also suggests that deal size may not be an issue.

“Where there is less urgency, I would expect that over time incoming primary investors could also cash out shareholders that are not re-upping for geopolitical or regulatory reasons. That seems like the cleanest solution,” says Lloyd Bradbury, a vice president at Greenhill. “If there’s some real-time sensitivity or urgency, I can certainly see flexible secondary capital playing a role to facilitate quicker exits. And there’s a spectrum of small to large secondary buyers that do look at these opportunities.”

A China-US parallel?

Further demand for fast-moving secondary solutions can be extrapolated in light of experiences in the US-China divide. Perhaps most dramatically, this includes executive orders banning Chinese social media players TikTok and WeChat last year that hinted political tensions can sometimes lead to sudden, unexpected sanctions against specific companies and investors.

In the case of India, this risk may be tempered, however, by the idea that while the local population of high-profile unicorns likely to attract this kind of attention is growing rapidly, their connection to China is trending in the opposite direction.

“Clearly there is heightened sensitivity about consumer data going out of the country and the government has outlined guidelines around data localization, which are applicable to all big tech companies. But I think this has more to do with new investments than existing investments, which will not be grandfathered. There won’t be any mandate for existing Chinese investors to exit,” says InnoVen’s Sharma.

“Reliance on Chinese investors will reduce gradually over time, either by dilution in new rounds, or through public listings, or through secondaries. There is adequate investor interest in the Indian venture ecosystem from global investors and we are also starting to see a domestic pool of capital, so high-quality companies will be able to raise money without any challenge.”

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• Topics
• South Asia
• GPs
• Regulation
• Secondaries
• India
• Innoven Capital
• NewQuest Capital Partners
• Greenhill Cogent