The document discusses conducting a feasibility study to build a portfolio of small and medium enterprise (SME) sectors in India that would be suitable for venture capital or private equity funding. It identifies potential high-growth SME sectors, constructs sample portfolios allocating funds across sectors, and projects cash flows over 10 years under different exit scenarios. The analysis finds that an SME fund is feasible and could achieve a 13.42% annualized return over 5 years.

1. Building an SME Portfolio – A VC’s
Perspective
Pranay Veer
PGDM 2011-13
NMIMS Hyderabad

2. Many SMEs in traditional sectors have limited access to equity
capital
To establish an Asset Management Company
Provide Venture Capital/ Private Equity funding services
To conduct a feasibility study of an SME Growth fund after identifying
potential SME Sectors
To critically evaluate the
To build a portfolio of the
To identify potential sectors identified sectors & suggest
sectors & project future Cash
for investment in SMEs highly potential sectors for
Flows of the fund
investment

3. How to know????
Is it feasible? If so – Which sectors? 5yr to 10 yr horizon?
Structure/ Framework – To study the feasibility of the SME fund
Analysis of the Environment
SME Industry Analysis Opportunities for Venture Capitalists in SME
Selection of SME Sectors
Identification of Sectors (12 Sectors) Assessment of Selected SME Sectors (6 Sectors)
Construction of Portfolio - Developing different Portfolios
Equal Weighted Portfolio Growth Based Portfolio Score Based Portfolio
Portfolio Projections - 10 Years
5 Year EXIT Scenario 3 Year EXIT Scenario
- Selected Scenarios

4. Analysis of the Environment
79000 SMEs or 5% of the total MSMEs in India
Investment Scenario
-Ministry of MSME in SMEs
Generate 30% of Contribute to 63% • Difficult to get
55% of the Gross conventional funding
total employment of total Fixed
Output
(28 lakhs) Assets • Most companies have
less asset base
• Take higher risk
Growth Rates -SME v/s Industry
7.92% 1.5
Average 12% times
2007-08 8% Venture capital - A
14%
savior
2006-07 11.50%
13% • Focus  Growth
2005-06 7.50% Industry prospects and not on
12%
security
2004-05 8% • Investment Long
11%
SME term horizon
2003-04 6.50% Sector
10% • Profile >> High risk
2002-03 6%  High return
9%
Source: SME White-book 2011-12, Businessworld

5. Selection of Sectors - MATRIX
1 2 3
Survey of Dun & Bradstreet Ministry of MSME
Venture Research
12
• Top 10 sectors based sectors
Capitalists • Identified 10 on the Total number of
• 12 websites potential sectors enterprises (74.18%)
M
A
N
U
F
A
C
T
U
R
I
N
G
Manufacturing Services
1. Food Products & Beverages 1. Retail
2. Textiles Selected
2. Hotels & Restaurants Sectors
3. Publishing, Printing & Reproduction of
Recorded Media
3. Education

6. Portfolio Construction
Avg. IIP Growth rate
Initial • Rs.20 Crores Manufacturing
(2005-12) 1.5 times
Corpus • Min. corpus to start a
fund under (AIF) these rates
of Fund Regulations (SME =
Industry *
Revenue growth rate (2012-13) 1.5)
Services (CMIE - Economic Survey –
2011)
To be invested in a series of: (3 stage investment)
Equal
Total Corpus 20 Crores Crore EXIT Yr weighted
Portfolio
Score
Year - 1 (2012) 25% 5 2017 Based
Portfolio
Year - 2 (2013) 35% 7 2018
Growth
Rate
Year - 3 (2014) 40% 8 2019 Based
portfolio

7. Portfolio Cash Flow - Criteria
No. of years to Exit the Proposed Investment
3 Years 5 years
Fund Projections
10 years (2012-2021)
Hit/Loss Ratio
1 in every 5 companies is considered as a Loss Company (20%)
No. of Companies calculation - For every investment (Hit/ Loss)
Below 1.5 Crores > 1.5 – 2.5 Crores > 2.5 – 3.5 Crores > 3.5 – 4.5 Crores
– 1 Company – 2 Companies – 3 Companies – 4 Companies

8. Cash Flows - 5 Year Exit Scenario

9. PARAMETERS 3 Year Exit Scenario 5 Year Exit Scenario
CAGR of the Portfolio 17.95% 18.59%
Average of the CAGR
9.76% 13.42%
(post Hit/Loss ratio)
High Risk, comparatively less Comparatively less Risk, Stable
Risk/ Return
returns Return
Comparison with the Benchmarks
FUND NAME 5 year Annualized
CATEGORY
(RANK 1 Funds – Money Control) Returns
INDEX SENSEX** 15%
SMALL & MID CAP HDFC Mid-Cap Opportunities Fund (G) 10%
SMALL & MID CAP SBI Magnum Emerging Businesses Fund (G) 6.60%
LARGE CAP Fidelity Equity Fund (G) 6.90%
LARGE CAP UTI Opportunities Fund (G) 12.60%
Index Franklin India Index Fund - BSE Sensex (G) 3.80%
Index UTI Nifty Index Fund (G) 3.50%
SME Fund SME Fund - Post Hit/loss ratio 13.42%
** SENSEX – 10 year annualized returns
Source: Money Control

10. FINDINGS & RECOMMENDATION
79000 SMEs in India contribute to 63% of total Fixed Assets and 55% of the Gross
Output of MSME
Growth rate of MSME sector is 1.5 times the Indian Industry
Manufacturing Segment – Food & Beverages, Textiles and Publishing, Printing &
Reproduction of Recorded Media
Services Segment – Education; Retail and Hotels & Restaurants
In 5 year Exit Scenario – Viable Strategy with a CAGR post Hit/Loss ratio of 13.42%
 SME Fund is a feasible option
 Setup:- After identifying budding companies in the potential
SME sectors

11. Limitations Scope for Improvement
• SME Industry - Very • Company level analysis
unorganized
• Matrix
• Data availability - Very limited
▫ Ratings
in Public domain
▫ Weights
• Lack of data  Assumptions
• Actual data of growth rate of
• Specific Company level info -not
sectors in SMEs
used
• Interpretations and conclusions
- Sector level
Exit Scenario and
Academic MSME Hit/Loss Ratio
Score Based
performance and
Contribution Matrix
challenges – An excel sheet
model

13. THANK YOU

14. Appendix I - Definition of MSME
Micro, Small & Medium Enterprises Development (MSMED) Act, 2006
Source: MSME Census 2006-07

15. Appendix II - Performance of MSME
PERFORMANCE OF MSME SECTOR
No. of Enterprises (In Lakhs)
Micro
14.85
Small
0.76
Medium
0.03
Total
15.64
% of Total Enterprises 94.94% 4.89% 0.17% 100
Employment (In Lakhs) 65.34 23.43 4.32 93.09
% 70.19% 25.17% 4.64% 100
Per Unit Employment 4.40 30.83 144.00 5.95
Fixed Assets (In ‘000 Crores) 169.53 223.5 56.09 449.12
% 37.75% 49.76% 12.49% 100
Per Unit Fixed Asset 11.42 294.08 1869.67 28.72
Gross Output (In ‘000 Crores) 312.97 318.79 75.74 707.5
% 44.24% 45.06% 10.71% 100
Per unit Output 21.08 419.46 2524.67 45.24
Source: Ministry of MSME Census 2006-07

16. Appendix III - Academic Contribution
1. Score Based Matrix – For Portfolio Construction
2. Analysis of MSME performance and challenges
3. Specific analysis and study on SME Financing challenges
4. Investment Scenario in MSMEs and opportunities to Venture
Capitalists
5. Construction of Portfolios based on SEBI – AIF Regulations (Draft)
6. Exit Scenario and Hit/Loss Ratio is used for the analysis – An excel
sheet model can be used to make 10 year projections for 3 year and 5
year exit scenario by only changing the portfolio weights.