Dear Investor,
Private Equity (PE) and Venture Capital (VC) investments in India has come of age over last couple of decades. The year 2021 has seen an unprecedented PE/VC inflows of a staggering USD 77 bn (vs USD 47.6 bn in 2020). This is quite encouraging considering a post-pandemic era which the economy has been witnessing. This is in stark contrast to the net outflows of FIIs for the same period at USD 12.5 bn (vs USD 8.9 bn of positive inflows in 2020) with majority of the outflows registered during the period April 2021 to December 2021 (net outflow of USD 19.6 bn, since the first quarter was positive inflows). An important aspect of such investments is to have an equally encouraging exit opportunities since the capital so raised needs to be returned to the investors with returns. The year 2021 witnessed the highest ever exits worth USD 43.2 bn (vs USD 5.9 bn in 2020 and vs previous highest of USD 27 bn in 2018), comprising of strategic sales, secondaries and public market exits. The public market exits has seen the new age businesses such as Nykaa, Zomato, Policybazaar and PayTM getting listed on the stock exchanges with retail participation which signifies that even a retail investor has evolved and is now able to appreciate the business model and the risk / rewards associated with the same.
The growth in investments has been across the life-cycles of companies with early stage investment (USD 28.8 bn) and buyouts (USD 22 bn) recording their highest ever investments while growth equity investments were at USD 19.2 bn, the balance was between PIPE transactions (USD 4.5 bn) and credit (USD 2.6 bn). Interesting trends has been emerging over the last few years as Venture Debt Funds and ESG criteria. ESG is getting recognised as an opportunity for value creation and fund houses are viewing it as a differentiated driver of value across the full investing value chain. The new fund raise by the PE/VC funds for 2021 was at USD 7.7 bn (vs USD 8.2 bn) which means a slight dip over last year. The sectoral focus in investments continued to be dominated by the e-commerce (USD 15 bn) and technology sector (USD 14.3 bn) followed by financial services (USD 11.2 bn). The investment in ecommerce sector was highest ever that has been received by any sector till date whereas the technology sector investment is higher than the cumulative investment received over past four years. The new age companies in the ecommerce, delivery platforms and edu-tech are also contributing significantly to job creation at the bottom of the pyramid which is likely to give a lot of fillip in terms of upliftment in their lifestyles. India boasts of a strong and one of the fastest-growing start-up ecosystems with over 80 unicorn start-ups as of 2021. The emergence of new models in fintech, consumer internet, education, enterprise tech and media and entertainment has revitalised funding in these sectors.
The PE/VC investments in the first half of 2022 is at around USD 34.2 bn, despite this number being higher than 2020, the overall environment seems to suggest that the momentum is tapering off considering the current global economic outlook and the geopolitical situation. Some of the key macro factors currently negatively impacting the global economy environment are rising inflation, pace of interest rate hikes by US Fed, spike in crude prices, fears of global recession, among others. The clear reflection of this is evidenced in the sequential numbers of H1-2022 vs H2-2021 which are overall down by about 50% to 70% margins across the board for both investments and exits (value/volume). Even for the month of July 2022 the PE/VC investments are less than 30% on y-o-y basis (USD 2.9 bn vs USD 9.7 bn). While India as an investment destination for PE/VC funds has remained fairly resilient, it is feeling some pressure due to the falling rupee and rise in inflation. More and more PE/VC funds are now emphasizing on positive unit economics and have curtailed cash-burn rates while making investment decisions. This is expected to drive consolidation across the sectors, especially with category leaders with a war-chest buying out those with shorter runways. There is a definite interest back, after couple of years, in the infrastructure and hard assets as investment focus. Thus, despite all the odds India’s position is likely to remain strong as far as the PE/VC investments and there seems to be enough dry powder for investments with the fund houses.
I will give full credit to the sound government policies and a flourishing Indian entrepreneurship for such an achievement. During the period 2003 to 2008 total FPI investment in India was USD 52 bn vs FDI of USD 40 bn, while for the period 2014 to 2022 the total FPI investment was USD 50 bn whereas the total FDI investment was 11x of this figure at USD 550 bn. Thus it is quite evident that India as an investment destination has evolved to a great extent. This also gives the country enough headroom to manage sharp outflows quite comfortably.
Happy Reading !!!