Why Razor Capital is betting on secondary investments in growth-stage Indian tech and digital startups

Razor Capital, a Gulf Cooperation Council-based private equity fund, is betting big on secondary investments in growth-stage Indian tech and digital startups. The company, which set up its first fund four years ago, says it is trying to fill a gap in the market in terms of liquidity when it comes to growth stage businesses. The company is raising its second offshore fund and is also planning to set up an Indian alternative investment fund (AIF) for investors from India.

“Our focus is on early- to mid-growth-stage companies in tech and digital India. These are companies in the Series B to Series D funding range,” said Abhinav Munshi, Co-founder & Managing Partner, Razor Capital. “We do both primary and secondary investing, but secondary investing is a very important part of our strategy. Typically, in every company, we make a primary investment and also a secondary investment as we feel that there are very favourable supply-demand dynamics in that secondary market, especially in the early- to mid-growth stages,” said Munshi in an interaction with Fortune India.

Globally, secondary investments have become a massive phenomenon in both private equity and venture capital, Munshi said. “Last year, in the US, there were more dollars deployed in secondary investments than in primary investments. But what we saw in India was that there was a huge overhang of portfolio companies sitting on the capital of funds, early investors, angels and, in some cases, employees, etc., who needed to exit. But given the stage of the business, they were still four or five years away from a public listing,” he said, adding that there are a lot of “great companies out there where we target secondary investments”.

Secondary investments a long-term opportunity

“We find that it (secondary investments) provides a lot of value to the ecosystem in the sense that we work closely with early-stage investors, and so we become the liquidity partner for them. In exchange, we’re able to get good visibility into their portfolios, understand their best businesses before we actually start evaluating them for investment,” Munshi explained, adding they found that for founders, things like capital clean-ups have been very valuable. “So, when you have a lot of angel investors who have been around for four, five or six years, they’ve done well on paper, but there’s a lot of liquidity pressure coming from these early investors. Managing 30 or 40 angels versus having one investor who will now be with the company for the next four to five years is valuable for founders,” he said, adding that for all these reasons, they felt that secondary investments were an extremely attractive, long-term opportunity in India.

The size of the private equity entity’s first fund was $35 million, which it invested in three companies. Zepto, a company from which Razor has partially exited, was the first one. The target size of the second fund is $75 million, Munshi revealed.