EXIT - The Most Important ‘Word’ in Investment

Exit - The mention brings in both joy & sorrow. It means different things to different stakeholders in the ecosystem.

The last few quarters have been more of grief (companies closing down, return of capital mid- stream, governance issues …) rather than Investors counting the moolahs of returns.

A business runs on profits and the growth in the topline revenue & profit is what is the fuel for investor interest among other things.

Today, ‘P’ is an often used letter - which is profit. The romance with ‘disrupting the status quo is on the wane. Today, the disruption is well thought out - will the enterprise be profitable & the investors make a return on the investment.

The capital flow into this space in a structured manner is on the rise.

Alternative Investment Fund (AIFs - as more popularly mentioned) has slowly become the chosen vehicle for investing.

When this was formalized in 2012, the committed amount was Rs 360 crore (with invested amount - Rs. 7 crore)

In 2023, the committed amount was $135 Bn (invested amount $53.69 Bn).

It has come a long way, and the numbers indicate - the expectations from the Indian startup ecosystem.

And now the investments for the past, the return of capital and on capital is being sought.

It’s a misnomer that the exit from AIF investments can happen in less than 3-5 years. Its an aberration or serendipity if that plays out. Investing in AiF’s has to be with a 5-8 year horizon, if not earlier.

This will set right the exit expectations.

Also, when you decide to invest in this asset class, it needs to be well thought out as liquidity is a challenge.

The count of exits in 2017 was 117 ( average exit value being $ 36mn) and in 2023, the count of exits being 83 (average exit value being $ 79 mn). So the count has reduced but the exit value being more than double.

This data paints a very positive picture of exits.

But the truth is far from this. The average investment holding period for the investor has gone up. And today, many of the early-stage investors face this ‘exit’ dilemma.

When the return of capital and return on capital takes time to materialize, fresh capital allocation to the opportunities becomes an issue. The prospective investors take longer time to decide on whether to invest. And this in turn impacts the ecosystem.

Today - growth at all costs has taken a back seat and the basics of running a business and entity at the forefront, which is good for the eco-system.

This will also ensure that ‘ exits’ can become more predictable.

Author

Brijesh Damodaran