There's likely to be more cash in the bag for Indian startups as India-dedicated private equity and venture capital funds are expected to undertake record fundraising in 2022, according to an IVCA-EY report.

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The projection comes after India-focused PE and VC funds secured $3 billion in January — nearly 40 percent of the $7.7 billion fundraise in 2021. Same month last year, such funds raised $854 million.

Over the last five years, private-money funds have bagged $44.6 billion. The fundraising saw an uptrend until 2019, but following the pandemic, it slowdown for two years. The first month of this year signaled a reversal in the trend.

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The global scenario is a key indicator as well with PE and VC fundraising touching an all-time high of $732 billion last year — a jump of 19 percent over 2020.

"Mirroring what has been observed in the US and European markets in 2021, we expect 2022 to be a record-setting year for fundraises by Indian dedicated PE/VC funds," said Vivek Soni, Partner and National Leader — Private Equity Services, EY.

The projection finds validity in Sequoia Capital India's plan to raise $2.8 billion in funds dedicated to Indian and South-East Asian startups. This fund is likely to be double the size of Sequoia India's previous fundraise of $1.35 billion during the first wave of the pandemic in mid-2020, as per a Moneycontrol report.

Sequoia Capital India is a unicorn builder with over 30 portfolio startups achieving a valuation status of $1 billion or more. Only Tiger Global has funded more Indian unicorns with investments in close to 40 billion-dollar startups.

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While India's rise as the world's third-largest unicorn creator becomes a strong pull for investors, exit opportunities through stock market listings offer a surer promise.

In fact, Sequoia Capital India was an early backer in last year's two most eye-catching IPOs of Indian startups — food aggregator Zomato and SaaS firm Freshworks.

Training an eye on such IPOs, Kotak Investment Advisors last month closed a $260 million fund to invest in 'high-quality companies across sectors, with a technology focus, robust unit economics, scalable business models and exit visibility'.

While the majority of the PE and VC fundraises over the past five years have been sector agnostic, it's only in recent years that fundraising by technology or internet-dedicated funds as well as clean energy-related funds has picked up, according to the IVCA-EY report.

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Last month, Aavishkaar Capital and German state-owned investment and development bank — KfW — announced the launch of a $250 million “ESG First Fund' to help mid-sized firms improve Environmental, Social, and Governance (ESG) standards.

"Our focus is to help businesses scale by allowing them to participate in the significant growth of consumer demand for socially-conscious products," said Ashish Patel, Managing Partner, ESG First Fund — Aavishkaar Capital.

This month, Capital A, an early-stage venture capital firm, launched a $10 million cleantech fund named ‘Evolve’ with the aim of furthering the electric vehicles (EV) ecosystem in India. The fund seeks to back startups developing EVs, EV batteries, battery-as-a-service and battery charging infrastructure.

While PEs have dominated fundraising over the last five years followed by VCs and real estate funds, credit plus venture debt funds are quickly taking their place as the fourth largest category.

Last month, the backer of startups ranging from Bira to Biryani Blues, venture debt firm — Anicut Capital — announced the final close of a $120 million fund. It plans to offer venture debt to about 30 early-to-growth stage startups across sectors for purposes such as acquisition financing, promoter/buyback financing, growth capital and capital restructuring.

Venture debt funding is fast emerging as an important source of capital, especially for startups. In 2021, over $600 million were raised by new-age companies in a bid to control equity dilution, manage working capital needs and fuel credit-based lending offerings, as per market estimates.

With the latest fundraise, Anicut joined other venture debt firms such as Trifecta Capital, Alteria Capital, Stride Ventures and Innoven Capital, who have all recently raised large pools of capital and backed over 30 unicorns. In fact, Trifecta Capital expects the final close of its third venture debt fund with a corpus of $200 million in early 2022.

Going forward, budget announcements, be it setting up of an expert panel to examine "appropriate measures" for scaling up PE and VC investments or the capping of surcharge on long-term capital gains to 15 percent, could result in greater willingness to participate among funds, HNIs and family offices.

However, there is a caveat. "While we remain sanguine about the Indian PE/VC sector in the medium to long term, downside risks like rising global inflation, rising crude oil prices, interest rate tightening by the U.S. Fed and impending elections in five key states in India remain key sensitivity factors to consider in the short-term,” said Soni.

(Edited by : Jomy Jos Pullokaran)