Sebi mulls PCVs to offer long funding

Unlike regular private equity (PE) and venture capital (VC) funds which have fixed lives, a PCV can last in perpetuity, and its best examples are famous investment houses like Berkshire Hathaway and Fairfax.

A working group under Sebi is examining whether it makes sense to allow PCVs in India, a person aware of the matter told ET. A sub-committee under Sebi’s Alternative Investment Policy Advisory Committee is looking into various aspects of the proposal: who all can invest in such vehicles, what should be the minimum amount of investment, whether and how the rules would be different from existing alternative investment funds (or AIFs) – the regulatory term for pooled vehicles like PE, VC, real estate, and debt funds.

No Indefinite Stretch for AIFs
“The aim is to study if there can be a regulatory framework for such permanent vehicles which can hold unlisted shares as long as it wants. These would be investors which take a long view of a business instead of showing return in a few years. This would be to make deep capital available for unlisted companies,” said a senior industry person.

Thus, investors putting a slice of their wealth in a PCV would be betting on comparatively slower growth though safer companies. “It would primarily give the flexibility to stay invested in a company you believe in.”

However, such proposed permanent or perpetual funds, catering to more sophisticated investors, would not be an escape route for normal AIFs to indefinitely stretch the lives of their funds. “This is an independent issue. The issues faced by funds with limited life have to be dealt with separately,” said a source.

AIFs typically have a life of 7 to 10 years. Sebi AIF regulations lay down that the tenure of a closed-ended AIF can only be extended up to a maximum 2 years with the consent of two-thirds of the investors by value.

Last year, Sebi categorically told the AIF industry that funds must close and liquidate within the specified period even if a predominant number of investors who have contributed to a fund pool agree on a tenure extension. In order to avoid a fire sale of securities and assets, fund managers delay exits on the grounds of a bad market, litigations, non-performance of portfolio companies, dip in property prices, or delays in IPOs by investee companies.

“No final decision has been taken on PCV. The group will give its recommendations to Sebi. There has been a demand from the industry. But, the regulator would have the last word on this,” said one of the persons.

Besides extending stable capital to companies promising a steady growth, PCVs are investment structures that help fund managers secure long-term capital commitments from limited partners (or, the investors in a PE or VC fund).

This is different from the regular PE model of seeking capital commitments from LPs, drawing down money, investing the amounts, and showcasing numbers and returns from investee companies or existing from them, to generate the next round of fund-raising.