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More Direct Investments From Global Funds Soon

PE tends to be 1-2 per cent of GDP and with India’s GDP expected to be around $7 trillion in 2028, PE deals could triple from the current level

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With stable gdp growth, lower inflation and fiscal deficit, strong demographics, increasing spending power and many other factors, India has become an attractive investment destination.  In 2017, private equity (PE) deals in India reached their highest ever, at around $26 billion, almost 60 per cent higher than 2016. While this jump was primarily on the back of some very large deals — the top 15 deals contributed 50 per cent of the $26 billion, and almost 85 per cent was in $50+ million deals, much higher than the typical 60-70 per cent — there is a noticeable trend of higher PE activity, even after adjusting for this lumpiness. Globally, PE tends to be 1-2 per cent of GDP and with India’s GDP expected to be around $7 trillion in 2028, PE deals could triple from the current levels.

However, the type of deals will probably undergo structural changes. Today, over two-thirds of PE is in significant minority deals (<25 per cent equity stakes). In 2017, 80 per cent of deals were in early stage or growth companies, with late-stage and buyouts contributing to just 10 per cent of deals. The main reason for fewer PE-controlled transactions in India has been the reluctance of promoter families to divest businesses and the relative scarcity of seasoned professionals to run PE-led businesses. This trend is changing; we are now seeing many families looking to divest and diversify and there are more professional managers available. In 10 years, one can expect many more buyout transactions.

While India’s attractiveness has brought in PE investments, their exits have not been very strong.  It is estimated that over half of the capital invested more than five years ago has not yet been exited. Exit is one metric that needs to be improved for the success of the PE industry in India — after all, it is fair to presume that investors will want a multiple on, and not a fraction of, their investments. It appears that this trend is finally changing. In 2017, PE firms delivered $16 billion of exits, significantly higher than prior years. More than half of these exits came from IPOs and public market sales, which signals confidence in the Indian markets. As the industry evolves and there are more PE-controlled deals, it is expected that the percentage of strategic sales and secondary sales to other financial sponsors will increase, and this should bring in the much-needed fillip for exits for the industry.

The composition of PE firms in India has been evolving. Initially, there were only domestic firms; as India’s attractiveness became apparent, global firms have entered. Domestic firms still raise most of their capital overseas, as the Indian investor in PE (limited partmers (LP)) universe is shallow. Over the next few years, with the growth of the Indian economy, Indian LPs will generate more wealth and will look to diversify their capital into alternate investments, and domestic firms will be beneficiaries of this trend. It is also expected that in addition to the global firms who are already in India, global LPs will also look to make direct investments into India. These LPs have shied away from India hitherto, as they prefer to write larger checks, and in the absence of many late-stage and buyout deals, there have not been too many such opportunities. With more buyout and late stage deals expected over the next 10 years, one should see many more direct investments from global endowment funds.

Lastly, regulations in India have been encouraging for the industry. Aided by government regulations and tax clarifications, new asset classes such as alternative investment funds and distressed funds have become prevalent in the Indian market, and so long as a supportive regulatory regime continues, the Indian PE industry should flourish over the next many years.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


Ashley Menezes

The author is Partner, ChrysCapital

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