SME (small and medium enterprise) funds as their name suggests invest in listed/unlisted micro, small and medium enterprises. These companies tend to meet their debt capital requirements through NBFCs. However, there exists a vacuum when it comes to equity funding for these companies. Typically, equity funding goes to start-ups or established listed and unlisted companies. SME funds help bridge this gap by providing equity financing to these companies.
As per SEBI regulations, SME funds fall under category 1 AIF (alternative investment fund). Consequently, they require minimum investment of Rs.1 crore and minimum lock-in is for 3 years with an additional extension option of 2 years. In addition, to be classified as an SME AIF, they need to invest minimum 75% of their assets in listed or proposed-to-be-listed or unlisted SME companies.
These funds generate returns when the SME is listed or when the company reports substantial growth post funding. If the fund delivers returns in excess of the minimum return (say 8%) then the fund management team takes a share of the excess returns.
Currently, the category has seen commitments (roughly equivalent to AUM in MF parlance) of Rs.260.86 crore as on March 2019.
As per news reports, major players in this space are Pantomath Sabrimala Investment Managers who raised Rs.40 crore in 2018 for investing in SMEs listed on the exchange platform. Morning Glory Capital Advisors also collected Rs.27 crore in the first tranche of their SME fund last year. Other private players are CapAleph Advisors and Aurum Capital. Government led organisations like Madhya Pradesh MSME Fund Trust, SIDBI Venture Capital Ltd. have also launched SME AIFs. SBI’s subsidiary SBICAP Ventures is also planning to launch an SME AIF fund.
You can recommend these funds to your HNI and UHNI clients. As they are a high risk-high return investments, investors with aggressive risk appetite can allocate a small portion of their assets to these funds for diversification.