India’s private equity market rose to new heights last year, thanks to improving macroeconomic conditions, a slightly better environment for exits and changes in valuation expectations, says a new report by management consultancy firm Bain & Company.
Total India PE deal value in 2015, including real estate, infrastructure and smaller deals, grew to approximately $23 billion—an increase of 51 per cent from 2014 and an increase of 34 per cent over peak levels of 2007 ($17 billion), according to the “India Private Equity Report 2016”, whose authors surveyed 29 venture capital and private equity firms.
The report cautions that fundraising might be more difficult going forward due to the government’s inability to pass crucial reforms, and uncertainty over the state of the economy. That might lead to further underperformance in the stock market, which could hinder successful initial public offerings (IPOs), the primary mode of exit for private equity investors.
PE firms are also worried about growing instances of their investors — referred to as limited partners (LPs) — and sovereign wealth funds (SWF) investing directly in Asian companies. The usual practice was them going through these funds when they wanted to make an investment in startups or listed firms.
In terms of attracting PE investments, India remains the most attractive market in Asia-Pacific, followed closely by China. “Several government initiatives—such as the Startup India program, tax regime rationalization and Make in India—have encouraged investments. More funds now participate in Indian markets — 240 in 2015 compared with 193 in 2014,” the report said.
The number of exits increased 10 per cent in 2015, and total exit value went up by 57 per cent to $9.4 billion. That’s heartening news for investors. Public market sales, secondary sales and strategic sales were equally prominent as exit options. Average deal sizes were significantly higher for secondary and strategic sales.
The average deal size across all deals increased by 15 per cent to $22 million in 2015. Excluding deals smaller than $10 million, the average deal size increased from $55 million in 2014 to $63 million in 2015. “The majority of GPs we surveyed expect average deal sizes to continue to rise over the next two to three years. They feel that healthcare and nancial services will be the most attractive sectors in the next two years,” the report said.
Funds cited improvements in capital markets and the macroeconomic environment as the primary factors for the increased exits in 2015.
Funds further expect exits to increase in the next two to three years. However, they believe that underperformance within the IPO market, macroeconomic instability and a mismatch in valuations could be potential hindrances.
Of the several pre-2008 deals that remain unexited, most are in the energy and finance sectors. PE funds aim to adopt a wait-and-see policy for these deals in 2016.
Funds surveyed in the report said top-line growth was the leading cause of value creation in portfolio companies. They also emphasise the need to build strong internal portfolio support teams and develop operating partners to create value in a disciplined manner. However, this intent has not translated into action as the scaling up of portfolio teams has been muted.
Consumer technology was the largest sector in terms of PE and VC investments in 2015, contributing approximately 30 per cent to overall deal value and accounting for approximately 41 per cent of overall deal volume. Deal values in the sector grew from $4.7 billion in 2014 to $6.9 billion in 2015. Deal volume was up from 295 in 2014 to 432 in 2015. The top 10 deals in the sector accounted for approximately $3.5 billion, representing half of the total investments.
Still, investors in consumer tech space face several challenges. “The capability of start-ups to scale up consistently and rapidly, market creation for disruptive business models, the work of ensuring profitability of the business model in the long run, a growing competitive intensity that is leading to lower capital efficiency and the need for management depth as companies progress,” the report says.
Only one in seven companies have been able to scale up and receive two or more rounds of funding. Major investors have backed multiple disruptors in the hope of finding clear winners.
“This is an opportune time for GPs to increase their investments in India. They need to develop strong teams for fund-raising, deal making and portfolio management. A solid value creation and implementation plan could be a differentiator for tapping quality deals,” the report says, referring to the current economy which is showing strong growth, has a stable currency and low inflation as commodity prices like oil have remained low.