Private equity boom in India, will it continue in 2020?

on Dec 24, 2019
  • Boom in private equity (PE), and venture capital (VC) funds investing billions, tripling to $36.3 billion in 2019
  • Deal flow is making a buzz and cheque sizes are also becoming larger.
  • Alternative investments have found a solid footing in India and will not drop materially.

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In the past three years, we have seen a boom in private equity (PE), and venture capital (VC) funds investing billions. In 2016 they invested about $12.8 billion, which tripled to $36.3 billion in 2019 across asset classes and deal sizes.

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The growth has been robust and diverse for a prolonged period.

Deal flow is making a buzz.

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From nearly 450 deals a decade ago, the Market now sees close to 900. 

Not only are funds clinching more deals, but cheque sizes are also becoming larger — the growth in average deal size at $42 million in 2019 from the earlier $18 million.

Historically, funds flow has been cyclical and typically went down as economic growth showed signs of a slowdown.

But, the last three years have seen phenomenal growth in PE and VC fund investments.

Also, the deal volume has been steady, indicating continued buoyancy and investor confidence.

Alternative investments in India- 2020 outlook

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Despite the heightened news about the economic growth rate in India, the country is relatively stable and growing- albeit at a slower pace. The slow growth may slightly affect the alternative investments, but not substantially in 2020.

Here are the reasons.

Market Diversity – Indian Market is diverse with several family offices, sovereign wealth funds, strategic investors investing more sharply. Different investors with different risk-return appetite and expectations make capital available even in relatively weaker times.

Diverse asset classes – Many new assets have come up, such as venture debt, structured deals, internet-focused funds, etc. There might be who will be more active, but the presence of multiple asset classes support deal flow. Also, PE and VC firms will find quality businesses resilient to economic downturns.

Debt vs. Equity – Credit availability has tightened, and entrepreneurs are becoming even more receptive to equity. They are seeking partners able to support their businesses even in tougher times. Stock markets have dept, and capital market flows are higher than ever. However, the Indian markets still do not show a significant appetite for direct investments or easier listing for smaller companies.

Sector maturity – Several opportunities emerge as the economic conditions change. For example, companies are capitalizing on PE more as wholesale lending shrinks. Some sectors like consumer and retail, Internet-based businesses like FoodTech are not seeing headwinds. In fact, they are benefiting as the economy is formalizing. 

Technology and the Internet sector is showing examples of profitable growth and are showing potential for large businesses being created from India, like in SaaS (software as a service). 

This has reduced dependence on Indian economic growth as funds construct their deal pipelines.

Adequate dry powder – Several and recent new India-focussed fund-raisings have taken place, and a lot of capital is ready to be put to work. Global funds and large VC investors also now have distinct India allocations and are continuing to scout for early-stage deals. 

31% of the funds’ infusion in 2019 happened in growth-stage startups, growing at 9% year-on-year since 2017.

Alternative investments have found a solid footing in India

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Overall, observers and economists continue to watch how the India story unfolds in 2020.

Meanwhile, alternative investments have found a solid footing in India and will not drop materially. 

Funds with large portfolios will continue to bet behind the gems in their portfolio and ensure they keep tracking the underlying investment case. 

Newer funds will continue to invest in India, given the fundamental attractiveness as the only Market that offers growth at scale.


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