The private equity and venture capital industry in India (hereby referred to as PE and VC, respectively) is off to a great start with the first quarter of the year, emerging as the best-ever, thanks to PE and VC investments worth US$ 11.4 billion in this period. This is 37 per cent higher compared with the same period in 2018, making it the best quarter ever for PE and VC investment activity, according to a report by EY.
Larger And More Complex Deals
In what is a sign of a maturing market, deals in India are becoming bigger and more complex. Large LPs are willing to make direct investments – thus, average deal size grew from US$34 million in 2016 to US$55 million in 2018. Some of the largest private investment in public equity (PIPE) investors – GIC, Temasek, OMERS and TFL Pension Fund – were very active in India in 2018.
Buyouts have contributed to this increase as well and will continue to grow in 2019 as well. In 2018, there were 49 buyouts valued at US$9.9 billion, equal to the value of buyouts in 2015, 2016 and 2017, demonstrating higher levels of confidence among Indian promoters to cede control to a PE/VC partner. Infrastructure and real estate sectors led the tally with eleven buyouts in 2018, followed by the life science sector that saw seven buyouts.
Start-Up Funding Growing At A Rapid Clip
Investment in start-ups soared by 84% to US$6.4 billion compared to US$3.5 billion in 2017 with SoftBank, Tencent and Naspers deploying significant amounts of capital in Indian start-ups. Eight start-ups entered the unicorn club in 2018 that included Oyo, Policy Bazaar, Delhivery, Pinelabs, Swiggy and Byju’s.
In 2019, PE investments anchored by sovereign wealth funds like ADIA, CPPIB and Temasek will rise as they have explicitly stated allocations worth billions of dollars towards Indian investments in 2019.
Even at a global level, there is a recognisable uptick in the size of transactions coming through in venture capital funding. This article by Alex Graham on Toptal about the state of the venture capital industry in 2019, provides a good snapshot of current trends in this area of the finance sector.
PE/VC-Backed Credit Platforms Boom
PEs and VCs are eyeing the debt route for superior risk adjusted returns as they setup credit platforms. Funders like KKR, AION, Xander, Altico Capital, Blackstone, Baring PE Asia, Bain Capital, Actis, Lone Star as well as Canadian pension fund CPPIB are actively setting up credit platforms in India.
Stressed Asset Investing On The Rise
India’s banking system is beleaguered with non-performing assets (NPAs) and stressed assets. NPAs stood at 10.2 per cent of all assets, while stressed assets accounted for 12.8 per cent of all assets, as per the Reserve Bank of India’s Financial Stability Report of December 2017. The Insolvency and Bankruptcy Code 2016 (IBC) requires banks to initiate the IBC process within 180 days of default, presenting an attractive opportunity to PE funds and strategic investors to pick up assets that can be turned around. Lone Star, Bain Capital – Ajay Piramal, IFC – Apollo, CDPQ – Edelweiss and Brookfield – SBI have all announced US$ 1 billion funds to invest in stressed assets. Others such as Varde Partners – Aditya Birla, KKR, JC Flowers, Apollo, Oaktree and Cerberus Capital are evaluating investments in distressed asset management.
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Control And Platform Deals To Grow
In the past, PEs and VCs have preferred to be financial investors, acquiring significant minority stakes coupled with standard protection rights. Over the last 4-5 years, complete buyouts have increased, with 2018 witnessing control transactions of over US$5 billion and this is set to continue in 2019. This is because PEs and VCs are now preferring operational and management control as a way to realize value. Platform deals are also a preferred route, as global sponsors look to partner with GPs with robust India experience rather than invest directly.
Top 3 Sectors To Watch Out For In 2019
1. Financial Services
The financial services industry has seen different kinds of models that include specialized Non-Banking Finance Companies (NBFCs), small finance banks, online credit platforms, insurance companies, housing finance companies (HFCs) and payment solution companies.
PE/VC investments in financial services grew 13% in 2018 compared to 2017. NBFCs are fast filling the vacuum created as banks continue to be weighed down by NPAs. Indeed, India’s NBFC sector will account for 20% of India’s credit market by 2020 compared to around 17% in 2018. PE/VCs invested US$3 billion into NBFCs in 2018.
Following the IL&FS crisis, NBFCs are finding it tough to access bank finance, thus bringing down valuations and attracting equity investments into the sector in 2019.
2. Real Estate and Infrastructure
Investments in infrastructure and real estate grew by 6% over 2017, accounting for US$6.3 billion or 18% of all investments in 2018. Commercial real estate particularly attracted interest with dedicated funds being raised to invest in such assets. Real Estate Investment Trusts (REITs) is an emerging asset class thanks to the regulatory changes made to facilitate its creation. In fact, the first ever REIT, Embassy Office Parks touched a high of Rs. 324.8 – 8.3 per cent above its initial public offering price of Rs. 300.
Reforms such as GST, 100% FDI in e-commerce marketplace and according infrastructure status to logistics has unleashed a boom in the industrial and warehousing sector, too. Everstone raised US$ 1.2 billion fund to invest under its Indospace platform to develop industrial and logistics parks.
In 2018, the technology sector recorded US$2.7 billion worth of investments, representing an increase of 47% over 2017.
Warburg Pincus’ funding commitment of US$1 billion to Vivtera Global Business Services, a business process management platform set up by industry stalwarts Mohit Thukral, Gaurav Sethi and Harpreet Duggal, was the major investment in this sector.
With the 2019 general elections behind us, the PE and VC industry is set to embark upon an exciting phase of growth that will not just see greater amounts of capital but also the evolution of regulation and business in the country.