Getting Ingrained In The Local Landscape
PE plays a vital role in India’s growth, the involvement and contribution is only expected to increase
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Over the last two decades, private equity (PE) has evolved from being an alternative source of financing for local businesses accustomed to limited credit options from banks, to a more readily accepted source of long-term capital that can accelerate the growth of these businesses. This is done by bringing in new capabilities and reinforcing the importance of financial discipline and capital allocation, which other forms of capital lack. Having witnessed cycles of exuberance and vibrancy, as well as a weak economic environment, the industry has emerged as a relatively stable source of capital and has played a transformational role in the fortunes of several Indian businesses
Between 2001 and 2014, PEs invested in 3,100 companies across 12 sectors in mature, mid-sized growth-and early-stage companies. Investments in growth-stage mid-sized companies accounted for around 80 per cent of all PE deals (46 per cent by value) in India during the period. In 2017, PE and venture capital investors invested $24 billion through 500+ transactions, compared to $16 billion through 700+ deals in 2016.
At this important juncture, where consistent value creation by PE firms is augmented by emergence of India as an attractive investment destination, the following trends are expected to drive future PE growth in India:
Indian investors as Limited Partners (LP): From a period when India was a small allocation of a global fund to the current scenario, where global fund houses with Asia-specific funds having large India exposure, the Indian PE industry has come a long way. In addition, the recent dominance of domestic PE funds that are increasingly backed by global LPs and a fast-emerging class of domestic individual investors, provides the breadth and depth that will make the Indian PE landscape more robust going forward.
Increased acceptance by promoter groups: While India primarily remains a growth capital market, Indian promoters are now increasingly willing to dilute larger stakes in their companies to offer equity to attract and incentivise professional management and PE investors
Investment opportunities in non-metro cities: Given that several metro cities are growing at slower pace due to to an immense burden of overpopulation and inadequate infrastructural needs, non-metro cities are witnessing increased economic activity and thus becoming more favourable investment destinations. In addition, entrepreneurs in these cities are becoming more open to external private capital and institutionalising their companies through measures such as improved corporate governance, appointing independent directors and succession planning.
Identifying hitherto untapped sectors: Considering the shift of India from an unorganised to an organised economy, PE firms are at the forefront of identifying new sectors to participate in. Sectors such as agarbatti, dairy, diagnostics, small finance banks, etc., which had not yet caught the interest of the public market have been pioneered by PE firms. This trend is set to gain more pace as PE firms get further ingrained in the local landscape.
Increased discipline at time of entry: In the 2005-08 era, the industry witnessed investments across sectors. Too much capital chasing few quality investable companies resulted in very high entry valuations making it difficult to secure exits with desired returns. PE firms and LPs emerged from this more cognizant of the importance of pricing all risks correctly. Going forward, this will ensure a more clinical approach for PE funds to identify companies to invest in and for investors to identify PE funds to invest in.
In conclusion, while PE already plays a vital role in India’s growth, the involvement and contribution is only expected to increase.
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