Why private equity is well positioned to drive India's new-age economy

With projections of a 7.4% rise in GDP for the coming year (2018-19), it is no wonder that private equity (PE) activity in India has registered a record high as well. Fast becoming the preferred choice of capital for Indian business, PE investments have risen nearly 57%, from USD 16.8 billion in-flows in 2016, to USD 26.4 billion in investments from 682 deals in 2017. 

This can be largely attributed to the attention the country received from Pension Funds and Sovereign Wealth Funds (SWFs), which together accounted for a little under a third of the investments during the year. While the absolute number of PE deals fell by 23% since 2016, there was a near 50% jump in value, highlighting the growing maturity, scale, and velocity of PE transactions in the economy. 

PE funds in India are now well-positioned to cover the entire range of transactions, from venture funding to complete buyouts. This was most apparent in the Digital & Technology, BFSI, Energy and Logistics segments, while IT & ITeS segment alone accounted for about a 45% share, with 346 deals and USD 11 billion in investments in 2017. The banking sector, buoyed by the USD 1 billion funding of Axis Bank by Bain Capital, garnered over USD 5.2 billion from 74 deals, while energy and logistics accounted for USD 1.5 billion and USD 1.4 billion in PE investments, respectively. Together, these four vital sectors received over 77% of total PE investments during 2017, revealing a clear pattern among investors.

In addition to these trends, the successful exits of PE funds also underscores the newly acquired confidence investors have with PE’s untapped potential in the Indian economy. The last year saw a total of 211 such exits, cumulatively valued at USD 15.7 billion – exceeding the previous high-water mark of 2015 by nearly 40% in terms of value. This positive scenario facilitates the creation of a self-sustaining ecosystem where successful exits initiate a self-perpetuating investment cycle as PE funds continue to raise larger pools of capital to deploy in India.

While PE funding in India has historically focused on growth capital rather than leveraged buyouts, the recent data seems to indicate a realignment with global patterns. Now, PE solutions are striving for greater strategic control, as we saw in the case of Karvy-General Atlantic, or are delving into a buy-and-build partnership to develop and scale a business from scratch, while also investing in specialized scenarios like stressed assets, as Bain and Piramal are doing with their USD 1 billion fund.

Given these transformations, PE is fast becoming a mainstream source of capital for Indian entrepreneurs. Clearly, PE capital has moved beyond its traditional role as growth capital and is offering new solutions to control or succession issues, stressed balance sheets, and inter se promoter disputes. PE funds, typically known for providing strategic guidance and insights at the Board level, are now assisting companies in operational matters such as optimizing manufacturing, streamlining distribution, maximizing advertising and sales impact, and restructuring financial accounts. 

PE funds, with their longer investment horizon, have proven themselves as committed allies that are willing to assist promoters in their quest for strategic long term success.  As a result of this approach, PE investments are expected to grow over three times in the next five years, emerging as the largest asset class in the market.

As the Indian economy and Indian entrepreneurship continue on this robust growth path, the demand for capital is expected to grow even faster. We can expect to see PE funds expands into new areas, like distressed asset situations, recapitalization, and buyout situations, as they continue to drive India’s new age economy.

Avendus's PE Expertise