(MENAFN- Live Mint)

Mumbai: Debt funds EvolutionX Debt Capital, Stride Ventures and BlackSoil Group, that primarily lend to fast-growing, new age economy companies in India, have expanded to markets in West Asia, Southeast Asia, and Europe in recent months to diversify exposure and maximise returns.

With limited opportunities in Indian markets and ongoing geopolitical uncertainties, this is likely to be the next leg of growth for these players, according to industry executives and consultants.

Venture debt comprises high-interest loans to early stage companies that want to raise capital without diluting equity. Typically, startups and early stage companies turn to such debt when venture capital becomes scarce or expensive. Venture debt is usually given after assessing the company's ability or likelihood to raise the next round of equity financing alongside other factors such as cash flows and overall financial health.

To be sure, venture capital remains the main source of finance for startups in India even as venture debt has gained a market as startups started looking for alternative funding sources with a decline in venture funding activity. As a result, one-stop debt solutions that simplify fundraising are being preferred.

Last week, Stride Ventures launched three funds across India, the Gulf Cooperation Council (GCC) countries, and the UK, on the back of a $300 million capital raise over the past six months. To date, Stride has three venture debt funds in India and has backed about 200 startups including BlueStone, Moneyview, Moove, Foxtale, CureSkin, NewMe, Nat Habit and AgroStar. (The six member countries of the GCC are Saudi Arabia, the UAE, Bahrain, Qatar, Oman, and Kuwait.)

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Stride Ventures managing partners Ishpreet Singh Gandhi (left) and Apoorva Sharma

While India remains the home base for its venture and growth credit business, managing partner Apoorva Sharma explained that the Stride plans to tap GCC's rapidly maturing ecosystem and Europe's innovation and financial hubs for its next leg of growth. The Stride funds, which were launched around April, have a target of an additional $300 million taking the total to $600 million.

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India, SE Asia synergies

Stride, BlackSoil, and EvolutionX are, in fact, following in the footsteps of Innoven Capital, which started in India in 2008 and has backed more than 200 companies including Ather, RenewBuy, Pepperfry, Dailyhunt and Captain Fresh. Over the years, it expanded its horizons into Southeast Asia (in 2015) and China (2017), making it one of the first venture debt providers to do so.

The BlackSoil Group's global wing aims to cater to the evolving debt needs among its clientele. The investment firm launched a $50 million Southeast Asian-focused credit fund in August.

“I think there are synergies between India and Southeast Asia in factors like per capita income, spending power, population demographics and entrepreneurial spirit. We are seeing many early-stage companies operating in sectors such as e-commerce, logistics and financial services trying to solve very similar problems as those in India," Varun Gupta, co-founder & managing partner, told Mint.

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Varun Gupta, co-founder & managing partner, BlackSoil

Given that the cost of equity works out to be even higher than debt, companies will need debt and similar pools of capital to fund growth, said Singapore-based Gupta, adding that BlackSoil will look at regions such as Australia and the India-Middle East corridor in future.

The push overseas among venture debt companies coincides with several Indian startups looking to tap the international markets for the next phase of growth. This, together with the fact that global capital has moved to Singapore after tariff wars began early this year "gives us the conviction in going to these areas," Gupta said.

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India abroad

Nidhi Killawala, partner at law firm Khaitan & Co, who specializes in venture capital and private equity advisory, echoed BlackSoil's view. "Many Indian startups are now building in India for the world, with offshore structures and overseas subsidiaries. Expanding abroad enables lenders to support these global operations, tap into new startup ecosystems, and engage with international LPs who prefer partnering through familiar jurisdictions," she said.

BlackSoil, which has backed companies like Yatra, MobiKwik, ideaForge, Moneyview and Curefoods in India, has disbursed around ₹8,425 crore across 245 deals and handles about ₹1,300 crore in assets under management for high growth companies, according to its website. In April, it received approval from the Reserve Bank of India to merge with Caspian Debt to create a alternative credit non-banking financial entity.

A private equity expert traced the expansion of venture debt firms overseas to two factors: the markets there are still young compared to India and the institutional investors, or limited partners, backing the funds see gaps in those markets.“It's important to note that the Indian venture debt ecosystem itself is currently not that large with 10-12 noteworthy players. If three or four funds are expanding overseas, that already represents 25–30% of the total players," EY India's private equity leader Vivek Soni said.

Elsewhere, growth stage debt financing platform EvolutionX Debt Capital, established by Temasek and DBS, which provides financing to companies across Asia with a focus on India, Southeast Asia and China, is set to make its first investment in the GCC region in next few months.

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Rahul Shah, partner, EvolutionX

The firm's partner Rahul Shah listed a few factors on what makes the region attractive to venture debt: economic growth forecast of over 4%, government initiatives towards growth of non-oil sectors and reforms, a young population with a high per capita income, digital transformation, and robust capital markets.

EvolutionX invests in growth-stage tech-enabled businesses and companies in new economy sectors such as consumer, education, financial services, EVs and healthcare. It has backed companies including LendingKart, Udaan, Mensa Brands, UpGrad and Ola Electric and its ticket sizes range from $20 million to $75 million. This slightly contrasts with the strategy at Stride and BlackSoil which cut cheques in the $2 million to $20 million bracket with a focus on earlier stage startups.

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Local, outbound support

In contrast, there are venture debt players from India that believe an India-rooted strategy works well. Vinod Murali, co-founder and managing partner, at Indian venture debt fund Alteria Capital, told Mint that the firm continues to believe in the depth of the Indian market opportunity, but has explored ways to support portfolio companies with overseas operations.“We have such relationships in the US and Southeast Asia that can help meet our portfolio companies' requirements as appropriate," he said.

“We believe expansion to another geography needs to be coupled with local underwriting and market expertise, else it may offer short-term benefits but create long-term stress," Murali said.

The expansion overseas of other debt funds is a sign of the venture debt companies trying to catch the wave early in places such as West Asia, which is seeing more early stage companies seeking such capital, said EY's Soni.

“They'll go where the startup ecosystem is maturing and VC funding activity is strong. Venture debt typically follows VC capital - it enters the cap table to help founders and existing equity holders reduce dilution. So, venture debt funds will focus on geographies with high startup activity and quality VC participation," he said, adding such moves reduce dependence on one market and will strengthen the ecosystem if overseas markets contribute even 20–30% of a fund's income over time.

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