LPs are making fund managers shrink; Many prefer it that way

In India’s private capital market, smaller is starting to look smarter.

Venture capital and private credit managers are increasingly moving away from raising large funds and leaning into leaner, sub-$100 million vehicles. That shift isn’t just being driven by tighter capital conditions—it’s being reinforced by a structural realignment of incentives across limited partners and general partners.

Traditionally, larger funds meant higher assets under management (AUM) and, in turn, greater compensation for managers. However, investor priorities are changing. Many limited partners (LPs) now favour disciplined fund sizes focusing on long-term performance rather than asset accumulation.

"We intentionally kept our fund small at $36 million to deliver over 55% IRR, in line with our past performance," says Sayan Ghosh, founder of Ortella Global Capital. "Smaller venture funds often outperform larger ones. Many VCs start small and scale up, but we prioritize IRR over AUM to align with LPs." 

Ghosh, who previously invested in Stellaris Venture Partners, Prime Venture Partners, and Endiya Ventures while at IFC, noted that funds under $50 million have consistently delivered stronger returns.

LPs are recalibrating around capital velocity, not vanity metrics—looking for GPs who can return capital fast and often. “Micro funds allow for faster deployment, tighter alignment, and better risk-adjusted IRRs,” says Utkarsh Sinha, managing director at Bexley Advisors.

The numbers back this claim. Over 60% of VC funds raised globally in 2023 and 2024 were under $100 million in size, Tracxn data showed. And while large funds still exist in India—Peak XV raised $2 billion across vehicles last year—they’re increasingly giving way to more compact alternatives.

Investor enthusiasm for private assets tends to fluctuate with public market cycles. "For the past five years, public markets have delivered strong returns, drawing family offices toward equities instead of venture funds. With recent market corrections, more capital is expected to flow back into VC. But the lack of capital has already forced fund managers to stay small and agile," said an LP who wished to remain anonymous. 

Shrinking by choice

What began as a constraint is now a strategy. Fund managers who once saw sub-$100 million raises as a temporary phase are now leaning into size discipline by design.

Newer funds are adapting with focused strategies. Aviral Bhatnagar’s A Junior VC (AJVC) recently closed its first pre-seed fund at Rs 100 crore, but acknowledges challenges in scaling further. "At a certain level, generating returns becomes tough. I believe the threshold is around Rs 600 crore because India has fewer companies that can scale to Rs 10,000 crore compared to the US," he says.

LPs, especially family offices and boutique wealth managers, are more interested in liquidity and risk-adjusted returns than logos or fund size. Managers are responding by focusing on capital rotation and interim liquidity, not paper markups.

“In micro funds, managers can complete a full cycle of investing, returning, and raising again—sometimes in under five years,” says Sinha. “That velocity becomes an asset when fundraising for future vintages.”

Manu Chandra, Founder of Sauce.VC, emphasises structuring funds to align with both founders and LPs. "Founders seek long-term partnerships over 10-15 years, while LPs want high returns with regular cash flows within 5-7 years. These interests are disconnected, so we structure different funds to participate at various stages of a company’s journey—from pre-revenue to IPO—ensuring both long-term commitment and regular cash returns."

Ashwin Poorswani, a limited partner in several funds, notes a shift in how emerging managers raise capital. "In India, we are seeing many first-time managers launch venture funds under the AIF umbrella. The statutory minimum investment in an AIF is Rs 1 crore, attracting participation from HNIs and family offices. Many fund managers are also tapping into wealth management networks to raise capital from these investors," he says.

Even established funds are staying lean. Sanjay Swamy of Prime Venture Partners explained why his firm kept its fund size consistent for its fifth fund. "For early-stage funds in India, the altitude isn’t $300 million. Multi-billion-dollar exits are rare, making outsized returns difficult. If a fund is too big, strong returns become impossible unless you get lucky—and you can’t plan to be lucky."

Fund size also directly impacts management fees, a key revenue stream for VCs. "Our management fee is tied to fund size. We don’t earn as much as partners at a $300 million fund, but this business is about getting rich slowly. Patience is key—whether you’re a founder, LP, or VC," Swamy adds.

Private credit mirrors the shift

The same logic is playing out in private credit, where volatility and duration risk have made large, slower-moving vehicles harder to justify.

Rahul Chowdhury, Founder of private credit fund RevX Capital, argues that smaller fund sizes help maintain investment discipline. "With a micro fund, we can fully deploy capital within six months, optimizing IRR throughout the fund’s tenure. A broader portfolio lets us strategically allocate to high-yield opportunities, maximizing risk-adjusted returns while retaining flexibility to capitalize on market inefficiencies."

Chowdhury has deliberately kept his fund size between Rs 500-750 crore to align with both his investment philosophy and LP expectations. "A shorter fund life ensures LPs get timely access to liquidity and consistent yield payments. This predictability helps them better plan future investments and cash flows."

The new blueprint

The Indian fund ecosystem has matured significantly over the past decade, with LPs becoming more sophisticated and managers adjusting to shifting capital flows. While the move toward smaller funds may have been driven by necessity, it is increasingly viewed as a long-term strategic advantage.

Manu Chandra highlights this balancing act: "When we sought Rs 250 crore for our third early-stage fund in 2024, we received Rs 850 crore in inbound demand within weeks—purely through word of mouth. To maintain size discipline, we had to turn away several cheques, ultimately capping the fund at Rs 365 crore. It was tough to say no to LPs, but we believe it was the right decision for long-term value creation."

As capital cycles shift and investors double down on fundamentals, micro funds may no longer be a fallback—they could define the future of private investing in India.