Optimism around PE investments in India continues as investments in Q4 of FY2016-17 (Jan – Mar 2017) at $7.6 billion were the highest in any fourth quarter in recent times, and 47% higher than Q4 of FY2015-16. They also accounted for over a third of the total investments made in FY2016-17, indicating positive investor sentiments towards the Indian economy going in to FY2017-18.
PE investors are sitting on some of the highest levels of dry powderin recent years. However, deal activity is likely to continue at a cautious pace, with investors focusing on quality deals and companies operating on strong fundamentals. Financial services, pharmaceuticals and life sciences, healthcare and consumer/consumer derivatives continue to be key sectors of focus. At the same time, renewables, infrastructure services and real estate also look set to get significant investor interest in FY18.
Top PE investments – YTD FY201718
The first two weeks of FY2017-18 saw deals worth over $1.5 billion. Whether the rest of the year would keep up and record higher levels of activity would be dependent on how the Indian economy and businesses in specific respond to several global and domestic factors. However, there is a cause for optimism.
a) FY2016-17 witnessed high levels of activity from sovereign wealth funds (SWFs) /pension funds (PFs), which have together invested over $15 billion over the last three financial years, primarily in late growth/secondary investments. Global leadership teams of most of these funds have made a strong commitment to India, and India’s investment needs meet their return expectations in most cases. This should drive their continued interest in India in FY2017-18.
b) Consumer internet/technology deals fell away in FY2016-17. We do expect some revival in this segment in FY2017-18, as:
(i) Consolidation in the consumer internet/technology segment would mean incremental funding for fewer businesses
(ii) Venture/early stage investors continue to look at new deals in the new tech space, in particular artificial intelligence/bitcoin/machine learning, etc.,
Apart from the traditional investor set, FY2016-17 saw the entry of Chinese investors into this segment, and this could result in significant incremental investments in FY2017-18.
c) We also expect a large number of secondary/tertiary deals this financial year. Of the investments made between 2007 and 2011, over 1,400 have not yet seen an exit/follow-on funding. Even if 20% of these were to see a transaction this year, deal volumes could see a significant jump. In this context, the government’s efforts at improving the ease of doing business in India are key. If corporate buyer activity picks up in India, a lot more exit/tertiary investment opportunities are likely.
d) Continued deleveraging by conglomerates of non-core business and succession issues at families are other evident triggers for enhanced buy-out activities at the moment.
e) Within the financial services space, stressed assets continue to seesignificant interest from funds. A number of the global PE and SWFs already have or are looking to tie up with local partners to set up asset reconstruction companies to tap into this opportunity. Simultaneously, many distressed asset funds have been looking at India and with the insolvency law not enacted would be looking at investable deals in the country.
There would, of course, be challenges. The impact of demonetisation on Indian businesses needs to be fully understood. Similarly, the impact of GST roll out will also reflect in this year’s performance and this could be a bit of a black box which could cloud investor perception in the short run. Global political volatility is another factor which investors watch out for when investing in emerging markets and we expect FY2017-18 to be no different. However, the biggest potential challenge to PE investments in FY2017-18 could be the robust state of our public markets.
FY2016-17 was a great year from an exit standpoint recording $8.7 billion across 277 exits with public market sales accounting for over 40% of the exit value. Going back, over the last three years, there were exits worth around over $25.5 billion, of which around 40% came from public markets. While this has been good news from an exit standpoint, it has also meant that the private equity investors have had to compete with a rather buoyant public market for deals.
Public market valuations in key PE sectors have seen sequential rise over the last 12 months.
The steep yield cycle, which aided a number of PE deals in FY2015-16 and FY2016-17, is also softening and that would have a bearing on the overall investments in FY2017-18 too. Having said so, we remain positive about PE deal activity in FY2017-18, owing to the factors we highlighted above, and the strong start to FY2017-18 augurs well to deal activity over the next twelve months.
(Sanjeev Krishan is PwC’s transactions advisory head. Views are personal.)