After amassing record capital in 2019, private equity (PE) and venture capital (VC) firms in India appear to have hit the wall as they try to wriggle free from the impact of the COVID-19 crisis that has thrown growth off gear – at least for the short term.
Funds raised by investment firms in India recorded a steep 77 per cent year-on-year decline in the first half of this year as limited partners (LPs), or investors, tightened their purse strings amidst a hazy outlook for business in the country.
PE and VC firms amassed a mere $949 million from January through June this year, compared with $4 billion in the same period in 2019, data collated by research firm Venture Intelligence shows.
Risk capital investors garnered a whopping total of $7.6 billion in 2019, while in 2018 and 2017, they raised $5.8 billion and $4.2 billion, respectively, to clock new investments and cash in on the India growth story.
LPs are hesitant in making new commitments on account of several factors. These include “mismatch in portfolio allocation due to disruptions in global financial markets, expected decline in distributions from existing funds as exits dry up, potential accelerated calls on existing commitments, difficulty in carrying out diligence due to the lockdown,” said Samir Sheth, partner and head of deal advisory services at accounting and advisory firm BDO India.
Amongst prominent fundraising deals clocked earlier this year, Asia’s healthcare-focused PE firm Quadria Capital raised $401 million, while Washington and Bengaluru-headquartered venture capitalist Quona Capital raised $203 million for fintech investments across India and Southeast Asia.
Other fund managers who made headlines for raising capital during the first six months of this year include Singapore-based Beenext, American hedge fund Falcon Edge Capital, and mid-stage, technology-focused venture capitalist Iron Pillar.
“Even though we raised the fund prior to the impact of COVID, we all could see it coming, though unclear on its magnitude at that point,” said Ganesh Rengaswamy, co-founding partner at Quona Capital. “If past crises are indicators, the outlook for funds with limited vintage is not great, and they are likely to get tested in these times. Also, funds with limited institutional investors might have a more difficult time.”
As expected, and in line with global trends, investors in alternative asset classes hit a pause button in the second quarter of 2020 as the impact of the pandemic became clearer across the globe.
According to a Prequin report, the aggregate amount raised by PE and VC firms globally stood at $116 billion during the second quarter of this year, the lowest since the first quarter of 2018 when fund managers raised $110 billion.
All’s not lost
In July, marquee venture capital firm Sequoia Capital raised a total of $1.35 billion for two new funds to invest across India and Southeast Asia. India-focused Nalanda Capital and early-stage VC firm HealthQuad raised $800 million and $68.5 million, respectively, in a nod to the long-term growth potential of India.
“There are new opportunities, too, which are emerging in insurance, digital, pharma, consumer-oriented sectors. PE investors are evaluating how to make most of the opportunities and are proceeding with their fundraising plans,” said Girish Vanvari, founder at Transaction Square, a tax, regulatory and business advisory firm. “It is interesting to note that most of these funds are India specific funds or funds that have been in India for a longer period of time.”
However, Blue Ashva Capital, which recently marked the first close of its maiden SME and startup focused fund in India with commitments of $60 million, has a different take on fundraising. “It’s all about the trust that one can build with investors. Fundraising is always a challenge and that too for a first-time fund manager,” said Satya Bansal, former chief executive of Barclays Private Bank in India and founder at Blue Ashva Capital.
“Given my stint in private banking in India and Singapore, we were connected with various family offices and potential pools of capital which helped us to some extent,” he added.
Investor sentiment in the immediate future is expected to be tepid, but the much-hyped consumption story of India is still intact.
Given that the penetration in many sectors such as healthcare, insurance, automobiles, and financial services, among others, is still extremely low in India compared to the other parts of the world, there are plenty of opportunities to ta.
Experienced firms with significant geography and sector expertise “may use this time as a great opportunity to build a war chest and capitalise on emerging business models and favourable valuations,” said BDO India’s Sheth.
After all, downturns incubate some of the most successful, innovative, disruptive and cost-effective business models.
“Post-crisis, we are likely to see some promising survivors who will have fewer competitors to deal with and greater resources at hand adopting newer trends borne out of this crisis,” said Quona Capital’s Rengaswamy.