When the global economy is being battered, India emerges as a shining beacon of success. The country’s political order has become good, and investors are flocking to tap opportunities there. Limited Partners (LPs) have made record fresh commitments to private equity, private credit, venture capital and public market alternative investment funds (AIFs) focused on India in the first three months of the year, according to VCCircle estimates based on official data. Additionally, in Q2 2023, PE funds raised strengthened by 50% on a quarterly basis when compared with last quarter.
But what does this mean for the world of private equity (PE) and venture capital (VC)? Which sectors are set to take off?
The good news is that some of the pressures that burdened the markets are starting to ease. As the general economic sentiment in India turns positive, the country’s private equity industry has a real opportunity to regain its past vibrancy and move towards making an even greater impact on the economy.
Despite a challenging global climate for private equity, India defied the odds and experienced a robust influx of PE-VC investments, reaching an impressive $61.6 billion in 2022. Despite a slight decrease from 2021's peak of $69.8B, India achieved over $60B PE-VC investments for the third consecutive year. With that, LPs are increasingly focusing on building out their co-investment and direct portfolios in India. Investing during slowdowns requires a delicate balance between art (understanding market dynamics, leveraging industry expertise etc.) and science (due diligence, financial modelling, etc.).
What is the current focus of LPs on portfolio management? How have their capabilities been demonstrated through specific strategies, and how have these strategies contributed to India's resilience in the face of adversity?
Investors face challenges in justifying past investment decisions, prompting a reevaluation of their future focus for success. Competitive processes have sometimes led to off-track investment calls and aggressive bidding behavior. As more stable GPs complete their investment cycles, there is a growing understanding that high entry multiples do not guarantee further multiple expansion at exit. Anticipating slow exits ahead, a significant buildup of yet to be exited PE assets is likely to occur. The pressure to return money to LPs is driving some VCs to sell stakes on secondary markets, but buyers are selective, focusing on top assets. Meanwhile, less attractive companies are struggling to generate demand, even at substantial discounts.
How will the consideration of potential headwinds and regulations influence the decision-making process for GPs in terms of their investments?
What does the future hold? Is PE in India poised for a $40 billion decade on the horizon?
In a highly volatile market, numerous companies find themselves in uncertain territory. And if history tells us anything, it’s that winning companies do not refrain from engaging in M&A while waiting for the market to stabilize; instead, they actively pursue deals. But in the race to acquire in a volatile market, it’s more crucial than ever to have confidence in their deals. The most reliable path to success lies in entering negotiations equipped with exclusive insights derived from a diligence process that is faster, more comprehensive, and more highly focused than your competitors. Better diligence allows companies to be bold where others might hesitate.
How do LPs leverage due diligence to secure advantageous deals or avoid unfavourable ones in the current business landscape? How has the nature and focus of diligence changed?
Family offices have been on the rise for many years. It is estimated that there are approximately 257 family offices in India that have invested in a total of 659 deals, with a significant investment amount of $1.33 billion to date according to Edge Insights. Yet, as is the case with many investment structures, family offices have undergone a series of changes in recent years. Two trends in particular—the rise of direct investing and co-investing—have commanded a lot of attention recently. What does this say about the new investment landscape in India? What do LPs think about this trend?
Investors emphasize the increasing importance of ESG factors. However, both LPs and private equity firms often lack adequate tools to assess the effectiveness of ESG initiatives. A survey revealed that less than 20% of LPs request ESG KPI reporting from GPs, and most GPs struggle to provide relevant data. What measures should they employ to improve ESG practices that contribute to increased value and performance across various metrics, enabling them to gain market share, attract top talent, and achieve cost reductions?
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