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Commerce and Industry Minister Piyush Goyal is spot on when he says that India needs far more venture capital to fund startups than what is on offer now. Indian startups need cash to grow and scale up. Where will the money come from? One way is for profitable businesses to invest in startups, if they do not have an opportunity to expand their own business.
A better way would be for large pools of long-term savings such as provident fund, pension funds, sovereign wealth funds and insurance to allocate a thin slice of their corpus to venture capital. Old savers would fund new ideas, and entrepreneurial energy would generate the returns to fund old age.
The Employees’ Provident Fund (EPF) and the National Pension System (NPS) could enhance returns for themselves by allocating a share of their corpus to fund startups. Archaic rules that mandate the EPF to invest 15% in equity and 85% in debt, must go. The EPF corpus — of over Rs 12 lakh crore — is large enough to diversify investment across asset classes and achieve the right trade-off between risk and reward.
Ditto for the NPS, which houses Rs 5.34 lakh crore. Subscribers will gain from diversifying the portfolio of asset classes to include real estate and private equity as well. Typically, pension funds that apportion a small percentage of their total funds to venture capital expect a 25-35% yearly return over the lifetime of the investment.
To earn superior returns, it would be prudent for these institutions to invest in established venture capital funds that have gained experience and expertise in managing allocations among startups. Fund managers — who assess the risk and the returns to enable subscribers earn superior returns to compensate for the risks that they take — must be incentivised.
A remuneration structure — akin to that of Canadian pension funds, in which the long-term performance bonus forms the largest chunk of a fund manager’s payout — is a good idea. It would foster the culture of maximising returns over the long term and discourage fraudulent practices.
Courtesy - The Economic Times.
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