The Edge

What The Private Equity Landscape Holds For India?

Reflecting on the past decade, some clear trends have emerged indicating how private equity investing is coming of age in India

The Indian private equity market has shown tremendous growth in the last few years. According to publicly available data investments increased from USD 31 billion in 2017 to USD 56 billion1 in 2020. The market has grown on the back of global funds that came into India with investing experience from other markets and the ability to write larger checks. Over time most global firms have localized their teams. The landscape continues to look attractive as India represents a vibrant growth market and the ability to generate returns. Despite the pandemic and headwinds last year in the Indian economy, the private equity sector has been a high performer and has continued to surge ahead in 2021.

Continued and growing interest in India investments

In India, several new digital themes are growing at a rapid rate viz. DTC, fintech, edtech, OTT/ gaming, and many others. Each of these are creating business models that are scaling rapidly and provide the ability to look for an alpha on returns and performance. The opportunities to find interesting business models to invest in are only growing.

“India is one of the few markets in the world where private equity investments largely follow a growth-oriented thesis vs. financial engineering. This is driven by the large middle class population, growing affluence, and strong demographics”

Investors in India are also becoming more experienced and growing in expertise with the ability to create and execute value creation plans successfully. The talent available for both transacting and value creation is getting deeper every year. The Indian PE market’s long-term prospects are strong and poised to gain more momentum and maturity with more deals, bigger deals, and buyout deals coming their way. More underwriting can also be expected with growth tech coming more and more into the ambit of traditional large PE, as they back specific themes for growth.

Larger investments in the form of majority/buyouts

As the Indian PE market matures, there is an increasing tendency of the funds to be open to writing larger checks and more importantly, investing in buyout positions. Buyouts allow funds to have more influence over value creation in the business viz. over strategic decisions, operational turnaround (where required), as well as leadership roles. Over time, we can see the prevalence of buyouts growing in India as the funds feel they can more actively drive outcomes. This is a trend that we expect to see an increase in going forward as well.

Over the past few years, exits are starting to show signs of maturity as well. The healthy growth in the numbers of deals and size of deals has improved the exit environment in the Indian economy. We are seeing early signs of growing popularity of IPO and strategic exits on the back of growing strategic interest and recent IPOs (e.g., AU Small Finance Bank, Dr. Lal Pathlabs, SBI Cards). Exits are determined by a number of factors beyond market conditions viz. timing of the investment, performance of the company on core metrics, stage of maturity, market interest, and fit with business and functional strategies, etc.

More tech oriented investments

PE funds (especially the funds with growth capital) have in recent times, started to focus on growth tech businesses, specifically the ones with more stable business models and economics. These fit well with the growth equity playbook focused on revenue increase and centered around execution and scalability. In recent years, IT/ SaaS and consumer technology firms such as e-commerce, fintech, foodtech, and edtech have attracted the largest investments.

If these trends continue to hold, as evidence of the past few years suggests, the growth activity in this sector will only increase.

About the author: Kanchan Samtani is Managing Director and Senior Partner, Boston Consulting Group

(Disclaimer: Views expressed in the article are personal)

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