A capital idea that allows promoters to keep equity

RAHUL KHANNA, Managing Partner, Trifecta Capital

Venture debt company Trifecta Capital, which also has an equity option, looking at a larger second fund

Rahul Khanna is rolling up his sleeves for more action as the venture debt firm Trifecta Capital, which he founded along with Nilesh Kothari, finalises plans to raise its second fund. Trifecta started operations in late 2014 and by September 2015, had achieved first close of its first fund at ₹175 crore. It grew the corpus to ₹500 crore and has invested in 23 companies.

He anticipates the second fund to be significantly big, with a larger pool of money from domestic investors, many of them in the first fund that includes banks, public and private sector insurance companies, development finance institutions like SIDBI, large endowments, families with large pools of money looking for a treasury product and a select set of families that has defined the old economy.



A veteran in VC investing



Rahul, who has more than two decades of venture capital investing, explains that the company has an investible corpus of ₹1,000 crore.

The first fund has a life of seven years and that money will come back and Trifecta will use it one more time before returning the capital. “Over the seven years, we will have two turns of capital. Effectively, it is a ₹1,000-crore investible corpus. We are at about 70 per cent drawn on our capital commitments. We think by first quarter of next year we will be fully drawn,” he says.

At the same, Rahul adds, Trifecta is also recycling the money; about $8-9 million has been recycled, somewhere in the range of ₹45 crore has already come back as principal repayments, which it has invested in new companies.

Trifecta expects the first fund to hold it in good stead for at least six more months. “We are now starting to think about how much incremental capital we will need, what should be the construct of Fund 2, how big should it be,” he says.

Venture debt, a recent phenomenon in India, helps start-up founders reduce their equity dilution during a fund raise. It also helps extend the runway, giving founders time to meet milestones and thus increase.

Unlike other venture debt providers, Trifecta Capital has an equity option when it lends to companies. The equity options, says Rahul, are negotiated at the point of lending to these companies. The entry price is fixed and typically up to the end of the life of the fund, Trifecta can exercise the equity options and capture some of the upside.

According to him, Trifecta has been returning income to its investors from the first quarter of being in business.

“As of last quarter, we were at about three per cent net yield to our investors for the quarter,” he says. Trifecta believes in investing in either the category leader or the key challenger in that sector. Its portfolio includes companies such as Big Basket, Paper Boat, Rivigo, Urban Ladder and Urban Clap.

Trifecta, a Category II Alternate Investment Fund, can invest in multiple instruments.

The first is a non-convertible debenture, which earns it a regular interest rate in the range of 15 per cent. Trifecta also subscribes to a partly-paid preference share, which is in the nature of an equity option.

“Typically for every 10 rupees of debt, we get ₹1-1.50 of equity as an option. This ends up becoming a fairly large pool of equity options that we can trade or exercise and capture the upside,” explains Rahul.



Right to invest



Trifecta also has a right to invest, which is a participation right, in a subsequent round of equity to a defined amount. He explains: “We will, say, do a ₹10-crore NCD, ₹1.5 crore of partly paid shares at the current valuation and another ₹1 crore as a right to invest in a future round of financing at the then prevailing valuation. We have a lot of opportunity to not only make a baseline return, but also capture a premium either through the partly paid share or the participation right.”

Almost 80 per cent of Trifecta’s investment in a company, says Rahul, comes in at the Series B stage or beyond and the rest at the Series A stage. Trifecta works with leading venture capital firms and also independently tracks companies that have raised VC funds. It lends around ₹5-30 crore, sometimes more, for three years, at an interest rate of 14.5-15.5 per cent. It has co-invested in five companies each with SAIF, Sequoia and Bessemer and three with Accel. It is, according to Rahul, sector agnostic, but looks for sectors where large pools of VC money have gone in. And, which sectors have emerged from concept stage and reached execution. It will, however, not invest in real estate and infrastructure sectors.

On the size of the venture debt industry in the country, Rahul says that, as a thumb rule, venture debt ranges between 10-20 per cent of the annual deployment of venture capital. Venture capital funding in 2016 was around $3 billion and the market size for venture debt was $300 million of absorption capacity.

“We believe that the market will continue to grow at 15-20 per cent. We think there is in the next three-four years, an absorption capacity of about a billion dollars of venture debt. We would like to cater to about 25-30 per cent of that market. We think there is an opportunity to deploy around $300 million by us in the next three years in venture debt,” he says.

Published on November 27, 2017

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