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India Private Equity: ‘Perfect Storm’ on the horizon
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Over the past decade, India has proved to be a very profitable destination for global private equity investors, with 2022 is expected to be a banner year for both investments and exits. We see a 'Perfect Storm' developing on the horizon, which could lead to some very large transactions for global buyout funds in India.

It has now been over 18 months since the first Covid-19 related lockdowns gripped the world, and India witnessed some of the toughest sets of restrictions, which went a long way in saving lives. As the country seeks a path to recovery, and uncertainty surrounding Covid-19 and its variants continues to linger, the broader Indian economy is set to deliver 8-10% real GDP growth in 2022.

The stock markets have rebounded well ahead of any actual recovery on the ground, driven partly by heightened global liquidity and by a strong growth outlook. The past two years saw record numbers of both private equity deals and IPOs in India. A little over $90 billion was deployed by private equity funds in 2020 and 2021 based on reported transactions, according to data sourced from data and intelligence platform VCC Edge and consultancy firm EY, while companies have also raised more than $16 billion via IPOs in 2021 alone, according to NSE data.

At Brookfield, we increased our own private equity assets under management in India by over $1 billion in the past two years.

The three key elements driving the perfect storm in 2022--access to ample 'dry powder', increasingly attractive valuations, and buyout opportunities in high-quality assets--should all come together by the second half of 2022, resulting in heightened deal activity.

Access to ample dry powder The capital available for large global funds is at an all-time high and should continue to rise. There is a lot of liquidity in the market, and given where interest rates stand currently, alternative fund managers should receive more than their fair share of additional capital to deploy. Alternative fund managers have delivered consistently strong returns over the last 10 years, and the high performing private equity GPs should find this environment very conducive for fund raising.

Increasingly attractive valuations The Covid crisis encouraged governments around the world to make available large sums of money at very low rates. This excess liquidity has created what some have called the “Everything Bubble.” Virtually every asset class in the world is now experiencing cycle high valuations - stock markets, crypto currency, and even digital art! And this excess liquidity is leading to elevated levels of inflation. What seemed like “transitory” inflation two months ago is more worrying today, and we could see some actions from the Federal Reserve and other government entities to reign in liquidity. This could result in a softening of valuations in 2H 2022.

Buyout opportunities in high-quality assets It is important for long-term capital providers to remain disciplined around capital deployment. The pandemic has helped enable investors to distinguish between assets that perform across cycles and those that are less resilient.

In 2022, we could see a heightened level of PE activity around high-quality, durable businesses at more reasonable valuations. Sectors such as technology and healthcare should continue to attract long-term buyout capital, as both are benefitting from multiyear, secular growth tail winds, and have proven business models that deliver across cycles. Other sectors such as financial services and industrials that have not benefitted as much from the public market euphoria of the last 12 months and could witness large buyout transactions at attractive valuations. It is critical for PE investors to maintain a high bar when it comes to asset quality.

At Brookfield, we focus on businesses that operate in highly durable sectors, with barriers to profitable scale, that provide essential services, and deliver high cash conversion. We also pursue only those opportunities where we believe we can add tangible value starting Day One of the transaction. Our primary sectors of interest remain technology, healthcare, financial services, and industrial services, and we target large-cheque buyout transactions in these sectors.

In summary, I expect 2022 to be a banner year for both investments and exits, and in anticipation of the Perfect Storm of 2022, I would like to share the two rules for success for PE investors in India: 

Rule No. 1: Never reveal everything you know
Rule No. 2: Follow Rule No.1

Aditya Joshi is a Managing Director in Brookfield's Private Equity Group and heads the private equity business for Brookfield in India and Middle East.

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