Despite a lull in investment sentiment, more than $24 billion (Rs 1.87 trillion) of private equity (PE) and venture capital (VC) investments across around 630 deals were recorded by May this year. This compares with 775 deals valued at $19 billion (Rs 1.45 trillion) closed by May 2021, said a report by consulting firm Bain & Company.
However, funds in India are anticipating corrections from last year’s high valuations and frenetic activity across deals and exits, said the India Private Equity Report 2022, in partnership with Indian Venture and Alternate Capital Association (IVCA).
“Funds are shifting their strategy to adapt to these changes by expanding cheque sizes, investing in deeper target relationships, and increasing value-creation capabilities, especially by setting up portfolio teams,” the report said.
Amid macro stress of inflation, geopolitical uncertainty and supply chain disruptions, the overall funding outlook for 2022 is expected to be sobering after an exuberant year for both deal activity and exits in 2021.
“Funding has become expensive and there could be some dip in valuations and we could see down rounds too. This could lead to lower fund-raising or different structuring to avoid them as it can affect the image of companies. While it is hard to predict whether it will necessarily happen, funding rounds are getting delayed or cancelled,” said Naman Bansal, associate partner at Bain’s Private Equity Practice.
Meanwhile, traditional funds are increasingly seeking buyout opportunities, with Blackstone, Baring, Carlyle, Advent, GIC, and KKR each investing more than $1 billion each in buyouts over the last three years, with an increasing outlay over the years.
Buyouts are also attractive as they give funds more control over value creation for high-value deals—enabled through operational turnarounds and deep sectoral focus. We expect to see more such differentiated fund strategies as India’s market attracts more investors, the report added.
About 46% of PE deals are buyouts, growing from 33% since 2016 which is a 3 times growth from 2016. As many as six funds deployed more than $1 billion each in buyouts over the last three years—Blackstone, Baring, Carlyle, Advent, GIC, and KKR.
Led by Carlyle’s $3 billion deal with Hexaware and Blackstone’s $2.8 billion Mphasis deal, larger deals were unlocked in 2021, and valuations were higher by 25–30% over past averages. The report highlighted five deals of more than $1 billion were also seen for the first time in a single year in the sector.
The competitive landscape, according to the report, within PE is undergoing some important shifts as the Indian market becomes more mature and the number of active funds increases. The competition within funds and increased participation of limited partners (LPs) are driving up valuations and making deal sourcing and faster execution increasingly critical.
Reaching approximately $70 billion in investments (in 2021), the PE-VC market was buzzing with frenetic deal activity and a complementary acceleration in exit momentum. Indian investments grew faster in 2021 than most major economies including China, with 96% growth over 2020, (excluding the mega deals of Jio Platforms and Reliance Retail).
Overall, in 2021, VC and growth equity also reached approximately $40 billion, riding on a more than 4-time growth after moderation in 2020.
Meanwhile, exits were at an all-time high in 2021 seeing more than $36 billion in exits, quadrupling the value over 2020’s approximately $9 billion.
Exit returns increased by 1.2 times to 5.6x in 2021 driven by high multiples on invested capital and large volume share of consumer technology, IT/ITES, and BFSI exits, like a year ago.
Bain & Company expects the momentum of PE/VC exits also to continue this year, but the public market sentiment will see moderation even though a strong future IPO pipeline led by BFSI and consumer tech awaits.
The report also underlined those LPs or limited partners who are becoming more active exploring co-investing with GPs (general partners).
Flipkart ($3.6 billion) and Mphasis ($2.8 billion) were the top co-invest deals in 2021.
“Co-invest enables funds to participate in deals with large cheque sizes, earlier inaccessible, by pooling resources. Access to large assets unlocks attractive/superior returns on capital compared to deals involving smaller assets. GPs bear a lower risk by sharing a part of the deal value with an LP and LPs gain access to GP strength in diligence at no additional cost,” it said.