What are SME Funds?
SME Funds are Category II AIFs that provide growth capital to Small and Medium Enterprises (SMEs) with revenues between ₹10–500 crore. India's 63 million MSMEs contribute 30% of GDP and 48% of exports, yet face a ₹25 lakh crore credit gap — creating a massive opportunity for AIFs.
- Underserved Market: Large credit and equity gap in the SME sector
- SME IPO Potential: BSE/NSE SME platform provides attractive exit routes
- Structured Returns: Combination of dividend, interest, and capital gains
- Promoter Alignment: Minority stake investments with strong governance rights
- Economic Moat: Many SMEs hold niche market leadership in B2B segments
Investment Approach
SME funds typically employ a hybrid equity-debt structure:
- Minority equity (15–49%) in profitable SMEs seeking growth capital
- Compulsory Convertible Debentures (CCDs) for downside protection
- Structured repayment + upside participation via equity kicker
- Active board participation and operational mentoring
- Exit via SME IPO, promoter buyback, or strategic acquirer