Mega deals see global funds grab lion's share of PE, VC investment in India

The Covid-19 pandemic has hit PE/VC investment activity hard, both globally as well as in India.
The share of global funds in the pool of overall private equity (PE) and venture capital (VC) investment in India has surged over the last three-and-a-half years.

 
Between 2017 and 2019, Indian PE/VC investments grew from $26 billion to $47 billion at a compound annual growth rate (CAGR) of almost 34.5 per cent. However, bulk of this growth has come from global funds investing higher amounts into India, pushing up deal sizes in both absolute as well as average terms.

As a result, the share of India-focused funds declined from 28 per cent in calendar year (CY) 2017 to 22 per cent the next year and to 13 per cent in CY19 and the first half of CY20, respectively.

During the last three and a half years, the percentage share of deal value contributed by deals greater than $100 million has been 71-75 per cent. Most of these large investments are being made by international general partners (GPs) from their global or Asian funds, leading to a rise in their percentage share of large deals from 84 per cent in 2017 to 97 per cent in H1 2020. The share of pension and sovereign wealth funds among global funds investing into India has varied between 20 and 42 per cent during this period. The bulk of the $9.5 billion invested in Jio Platforms until June 30, for instance, was from global investors, including sovereign wealth funds.

“The main reason for the decline in the percentage share of India-focused funds is the growth in large, complex deals of over $100 million, which account for almost three-fourths of the total market now,” said Vivek Soni, partner and national leader-private equity services, EY India. The second reason is the surge in large, control transactions or buyouts. Large buyouts, which were 12 per cent of the total deal value in 2017, rose to 34 per cent in 2018, and further to 44 per cent in 2019.

“Structurally, there are far fewer number of Indian GPs that have the wherewithal of executing and managing large, $100 million-plus buyouts than global funds, who, by virtue of their larger infrastructure and capital availability, prefer to do these large and complex transactions,” Soni added.

Soni believes that India’s ability to attract global capital in larger amounts reflects the global competitiveness of the Indian PE industry. Having said that, most of this foreign capital is looking for superior risk-adjusted return and is fungible, so India will need to continue to work on remaining an attractive destination for this foreign capital.

According to Siddharth Shah, partner, Khaitan & Co, India needs to wake up to the fact that it is competing not only against other emerging markets, but also against developed markets in order to attract global PE allocation.

“Globally, investors are reallocating their portfolios from traditional to alternative asset classes. That means the amount of dry powder that is available is going up. But the share of allocation coming to India vis-a-vis other countries may not grow at the same pace, and India may see some marginalisation in percentage terms. However, in absolute terms the amount of dollars committed to India should continue to grow, so I wouldn't be overly concerned with the current situation. But, it’s a potential that we can tap into,” said Shah.

The Covid-19 pandemic has hit PE/VC investment activity hard, both globally as well as in India. EY India estimates a 45-60 per cent contraction in Indian PE/VC investment activity this year from the record highs seen in 2019.



Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel