The Rise of the Indian Private Equity Market

Introduction

The global private equity market has been swiftly gaining popularity and is growing at a significant rate. According to McKinsey’s annual private market review, global private equity fundraising has reached a new high in 2021, with a total increase of 19.7% compared to 2020. Furthermore, when looking at global fund performance by asset type it can be seen that private equity outperforms other asset classes across quartiles. When comparing the growth in global private equity valuation with growth in public equities’ market capitalisation, PE valuation has grown by 7.5 times, twice as fast as public-market capitalization. When looking at the Indian economy, despite the COVID-19 pandemic the Asian Development Bank estimates an 8.9% growth rate in Indian GDP in 2021-2022, making it one of the fastest-growing major economies in the world. Moreover, India was the 5th largest recipient of FDI inflows in 2020 receiving $64 billion, a number that increased to 74 Billion in 2021. This multitude of factors depicts India as a land of growth and opportunity for investors worldwide. Thus coupled with the market’s growing interest in shifting more heavily towards private equity, the rise of private equity in India is well worth exploring.

Evolution of Private Equity

Over the past decade, PE in India has seen tremendous growth, with PE investments in India increasing from $8.4 Billion in 2010 to $77 Billion in 2021, more than a ninefold increase in a mere 10 years. Although this value is likely to plateau as the market matures, it is currently showing no signs of stopping with the investments increasing by almost 62% in the span of one year (2020-2021). Furthermore, a large portion of India’s PE scene is actually in venture capital for the country’s numerous start-ups. In 2021 India passed the UK as the third-largest ecosystem for startups, with over 44 unicorns (privately held companies with valuations of $1 Billion or more). Therefore, it can be seen that it isn’t only the sheer number of deals that increased since 2010, but the notable 3.5x increase in “mega deals” (deals of over $100 Million) suggests that the Indian PE market has become more relevant on a global scale attracting foreign as well as domestic capital.

In 2012, the Securities and Exchange Board of India (SEBI), introduced a set of alternative investment fund regulations splitting funds into two categories. Category 1 includes venture capital with investments mainly focused on start-ups or SMEs (small to medium enterprises). On the other hand Category 2 includes alternative investment funds such as PE funds or debt funds. When looking at the growth of the categories since 2012 the average size of Category 2 funds has continued to grow reaching $145 million as of 2021, while the Category 1 funds have remained at a similar average size of $37 million. Although this may initially seem to portray a lack of interest in Indian VC funds this is not the case. As investments in start-ups and SMEs usually carry more risk, it is natural for the average size to be lower than Category 2. Therefore, this growth in the average size of category 2 funds actually serves to highlight the increasing maturity of the Indian PE market as investors gain confidence thus injecting more capital.

Ultimately, the PE market in India has matured from a small market that attracted few investments into a large global market that is able to compete with those of more developed nations.

How the Exit Environment has Evolved

Having a solid exit strategy is arguably the most important part of a private equity deal, as the outcome of the exit determines whether the fundraising and investment periods were worthwhile. This is especially relevant as according to Blackstone’s Private Wealth Solutions group the lifecycle of a PE deal typically takes around 7 to 10 years. Therefore, when determining the appeal of a PE market to investors, ensuring that there are viable exit options is paramount.

2021 displayed the highest exits recorded in Indian PEVC history. Furthermore, there is also a shift away from the traditional exit strategy of a joint venture with an existing listed company. Instead, there has been an increase in IPOs where in the first quarter of 2021 around 45% of all exits were through IPOs. Despite a large number of deals, when considering the size of the exit deals, IPOs rank third, surpassed by strategic sales and secondary sales. When comparing this to the US PE market we can see that although strategic sales are the top exit strategy by size in both markets, the US has SPACs (special purpose acquisition companies) as the second and IPOs as a third, highlighting how a more mature market is also better established with non-traditional exit methods.

In India exit vehicles such as SPACs are still at an incipient stage. However, attention towards adopting these other means is swiftly increasing. Despite this, according to Pranav Sayta, Indian regulation needs to be suitably structured before SPACs can compete with other exit strategies as a viable option. This is due to India’s currently requiring regulatory approval at critical moments in the deal, such as at the time of investment as well as de-SPACing (stage after the execution of the final agreement and before the merger between the public entity with the target operating company). Therefore, these regulatory requirements at pivotal points act as a deterrent from SPACs as investors become wary of the delays created by meeting regulations.

The exit environment of the Indian PE market is by no means well established and is still undergoing a period of evolution and adaptation. However, we are seeing signs that hint at the beginning of a shift towards maturity where along with the PE market in general, exit strategies will also simultaneously grow in variety, reliability and ease of implementation.

Unicorns in India

India’s private equity space does not only consist of large asset-heavy firms that get acquired by traditional PE investors. Conversely, one of the Indian market’s most attractive features is the abundance of quality start-ups. The number of Indian unicorns has increased at a drastic rate, with the market having 70 unicorns by the end of 2021 and 7 more added within the first 6 weeks of 2022. This number places India third in the world, only surpassed by the USA and China – the two largest economies of the world. When considering that the USA has a GDP of almost 10 times India’s closely followed by China’s at 7 times, India’s global ranking in terms of unicorns becomes all the more impressive. Highlighting, the Indian PE market’s sizeable potential not only in terms of established PE deals but also for venture capital.

The Future of the Indian Market

A significant driving factor for the Indian market is quite simply its sheer size. With a population of 1.38 Billion, the Indian market is comparable to the Chinese one when considering solely population. However, unlike China the Indian market is not as developed, receiving much less attention from foreign players over the past decades. Despite this, over the past 10 years, India’s GDP (although significantly smaller) has grown at a faster rate than that of its Chinese counterpart. Potentially providing a new hotspot for investments in private equity.

Furthermore, the Indian government is aware of the country’s PE market potential, therefore they are implementing various policies to aid the growth of the PE market and promote investment in the country. For example, the state-run fund of funds known as the SIDIBI (Small Industries Development Bank of India), strives toward boosting entrepreneurship through the indirect funding of start-ups by providing funds to VC funds. This show of support from the government does not solely serve to boost economic activity through subsidies, but it also enhances the perception of market stability for foreign investors, as seeing the government closely involved with the market can boost confidence. SEBI also decreased the lock-in period for promoters’ investment post IPO from three years to 18 months, making it much easier for entrepreneurs to exit their ventures. Thus leading to entrepreneurs being more likely to accept PE deals as there are fewer barriers to exit, increasing the quantity and speed of deals in the PE market as a whole.

Conclusion

The Indian economy as a whole is flourishing and its PE market is no different. The future of the Indian PE market is looking like a bright one, with increased success stories and polished legislation paving the way for continued growth as the market eventually shifts towards maturity. Furthermore, the rapid growth of the global PE market and a general shift away from public equity suggests that this market isn’t just a bubble, seeming well equipped to ensure longevity in the future.