Strong tech wave powers India's private equity advance
Solid economic progress is supporting the growth of a knowledge-based and digital India, which has spurred the country's burgeoning private equity market, according to a new report.
‘The Rise of India’s Private Equity Market’, published this week by CAIA Association, the global education body for alternative investment professionals, notes that India’s GDP is expected to reach 9.5% in 2022, making it the fastest-growing major economy in the world.
“Prime Minister Narendra Modi’s reform agenda is showcasing opportunities and gradually eradicating the structural inefficiencies that held India back for so long. By doing so, the government has created a robust launchpad for accelerated economic growth,” according to Jo Murphy, Hong Kong-based managing director at CAIA.
Net average annual foreign direct investment (FDI) inflows to India measured approximately $38 billion between 2016 and 2020, making it the fourth leading destination for FDI worldwide.
The bulk of the capital flowing into PE funds (around 85%) is sourced from limited partners in North America and Europe, plus sovereign wealth funds like Singapore’s GIC and Temasek, the Abu Dhabi Investment Authority and Qatar Investment Authority.
DOMESTIC CHALLENGES
The challenge facing India is to develop its domestic LP community, according to Goa-based Arvind Mathur, chairman of Private Equity Pro Partners. “The potential of domestic LPs is as yet untapped in any meaningful way,” he said.
Mathur added that India’s Employees Provident Fund Organisation (EPFO) and the National Pension Scheme are among the potential investors that need to grow their PE skill sets. “In the long run, more capital flows should come from these domestic institutions.”
CAIA’s report said some steps have been taken in this regard. For example, domestic insurance companies have begun investing in locally-registered alternative investment funds.
UNICORN STABLE
India has the third highest number of unicorns – startups valued at over $1 billion – after the US and China. A paper published by the Asian Development Bank in 2020 estimated that India had 26,000 startups, making it the third-largest startup ecosystem in the world.
According to research firm Venture Intelligence, the equity value of the 55 Indian unicorns they identified in mid-2021 is nearly as much as the assets under management of India’s entire domestic equity mutual fund industry.
CAIA believes that, at the current pace, India could easily have more than 100 unicorns by 2025.
“India can convert many of the challenges it currently faces into sustainable investment opportunities,” said Harsh Singhal, managing director for India at Canadian investor CDPQ.
“For example, about 40% of Indians will still not have access to fresh water by 2030. This is a challenge but also represents a huge opportunity.”
RENEWABLES
Among the latest crop of Indian unicorns are four companies CDPQ has identified with a focus on renewable energy. Singhal said recent research indicates that global cleantech investments have grown 37x in the past 6 years and these companies are already giving substantial returns.
The India growth opportunity rests largely on a handful of key aspects, according to CAIA. Notably, a young population that is growing as a proportion of working age people, combined with increasing urbanisation and the country’s growth as a technology hub.
“With almost 30% of India’s citizens under the age of 14, there is undoubtedly a demographic dividend that works to the advantage of the technology sector,” said the report.
“As India gets younger and Tier 2 cities gain greater attention from developers and investors, a technology-driven digital eco-system will be one of the most exciting growth areas of the Indian economy.”
COVID CATAPULT
In the wake of the Covid-19 pandemic, India has emerged as the fastest-growing and third largest fintech ecosystem in the world. The number of fintech transactions greater than $100 million rose from 28 during the first half of 2020, to 73 in the first half of 2021.
E-Commerce has largely defined the success of VC in India over the last decade, said Venture Intelligence founder Arun Natarajan. “The pandemic served to catapult e-commerce to the next orbit, with various segments including direct-to-consumer brands and social commerce models attracting large amounts of capital.”
By the end of 2021, the average PE fund size was $94 million and the average VC fund was $35 million. CAIA expects these averages will keep growing as India continues to attract larger, more established fund houses, drawn in by the successful exits – mainly public market sales - of global investors in recent years.
In 2021, India saw the largest harvest ever for PE and VC investors in India, with roughly $19 billion in exits in the first half alone. Relatively recent ‘mega-exits’ like the Flipkart-Walmart deal, Carlyle’s partial exit from SBI Cards, Bain Capital and GIC’s exit from Genpact and the more recent IPO of Zomato, have built confidence around India’s PE and VC landscape.