India funds view direct investments by limited partners a threat: Bain report

India-focussed private equity funds believe that competition from limited partners investing directly with regional and local funds is a key concern, according to a report by Bain & Company.

The top priority for funds in 2018 will be making new deals, the consultancy said in its India Private Equity Report 2018. The funds expect financial services, consumer products and retail sector to see maximum investment activity in 2018. They also feel that the current valuations are high and expect a slowdown in 2018, Bain said.

The report also said that PE funds have developed pockets of strength across sectors and regions, and the number of active players in the market has increased. Also, most investors expect to offer more co-investment opportunities to LPs in 2018, the report added.


India-focussed funds recorded 48% growth in capital raised to an aggregate $5.7 billion in 2017. Dry powder, or money yet to be invested, was approximately $9 billion, similar to levels in 2015 and 2016, indicating no dearth of capital for good-quality deals.

Aided by government regulations and tax breaks, alternative investment funds (AIFs) and distressed assets grew in India. The number of registered AIFs in India has more than doubled over the past couple of years and totaled 346 in 2017. AIFs have been a significant contributor to overall fundraising in the Indian market and helped raise $5.1 billion in 2017, more than double their 2016 total.

AIF fundraising grew thanks to the strong performance of public markets and regulation changes in June 2017 that allowed Category III funds—which include public market funds and hedge funds—to participate in commodity trading, said the report.

Opening the market to foreign institutional investors and exempting AIFs from a minimum lock-in period for pre-IPO investments for Category II funds—which include PE funds—further boosted growth.

Distressed asset funds also gained momentum in 2017 following the implementation of the Insolvency and Bankruptcy Code and other regulatory measures. Private equity players looking to acquire distressed assets include CDPQ, Edelweiss Financial Services, Blackstone, International Asset Reconstruction Company, Piramal Group, Bain Capital Credit, IL&FS and The Capital Group Companies, Inc., which have together set aside a fund target of more than $2.5 billion for distressed asset management.

M&A activity in India increased 53.3% to $77.6 billion in 2017 while PE deals reached $24.4 billion.


Bain found that funds believe a number of secondary and strategic sales will increase but a mismatch in valuation expectations and maintaining high-level returns could hinder exits.

More than 200 exits took place in 2017 with exit values growing 60% to almost $16 billion. Initial public offerings (IPOs) are the primary exit mode in India.

The number of exits increased 7% to 211 from 197 in 2016, but big-ticket deals powered the exit value. The top 10 exits in 2017 accounted for almost 40% of the total exit value.

There was a marked increase in the number of public market sales, including IPOs, which rose from 45% in 2016 to 50% in 2017, suggesting confidence in the Indian market.

The major exits include Qatar Foundation Endowment divesting its stake in Bharti Airtel Ltd, Tiger Global selling a stake in Flipkart for $800 million and Apax Partners exiting GlobalLogic for $780 million. Tiger Global also exited Ola in a secondary sale for $500 million.

Among the big IPO sales, Fairfax Financial Holdings Ltd exited ICICI Lombard for $558 million. Fairfax also sold its holding in ICICI Lombard in another secondary sale for $383 million, making the total exit value close to $1 billion.

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