As India nears a watershed moment of becoming the world's third-largest economy, overtaking Japan and Germany, one must reflect on the correlation between the maturation of its private equity and venture capital markets and the nation's growing knowledge and capacity to nurture business growth effectively.
The Indian economy has undergone a remarkable transformation in recent years, driven by favourable demographics, rising incomes, and a growing middle class. This growth saga would remain inadequate without acknowledging the integral role of private equity. Private equity plays a crucial part within the larger alternate capital ecosystem, serving as a substratum to the superstructure.
Private equity does more than just provide vital capital. It also offers strategic guidance and operational acumen to numerous promising enterprises. It is compelling that what was once about building a business has now evolved into shaping an entire economy.
Historical Context and Impact
Prior to the global financial crisis, private equity fund managers focused exclusively on US and Western European markets. The paradigm shifted in the mid-1990s when an increasing focus towards the Chinese and Indian economies came to the fore. Since then, both the Indian economy and its private equity landscape have not looked back. 1
Within 15 years from the turn of this century, close to 3,100 companies received infusions of private equity capital. Roughly half were companies with annual revenue of less than $2 million, and another 30 per cent were companies with revenue of $2 million to $125 million a year, underscoring the emphatic contribution of private equity in nurturing early-stage ventures and small and medium-sized enterprises. 2
Strategic Alignment with the National Growth
A vital cog of the private capital ecosystem is its sheer range of investments spanning varied sectors driving the nation's economic growth. The alternate capital ecosystem has exhibited remarkable acumen in spotting and capitalising on emerging trends. Over the years, there have been consistent investments in young and fledgling startups and established companies alike, providing an impetus to growth in dynamic sectors like technology, e-commerce, consumer goods, and healthcare.
In particular, the private equity market in India has experienced a tremendous upswing in recent years, with annual investment volumes averaging approximately USD 40 billion over the last five years.
More importantly, a significant portion of India's rapidly expanding private enterprises are concentrated in sectors which are set to gain immensely from the nation's growth trajectory, such as consumer goods, healthcare, and technology. These industries account for a substantial share, and nearly 60 per cent, of the total deal volume within the private equity space in India.3 In 2022, private equity and venture capital investments accounted for 1.2 per cent of the country's GDP. By 2027, this share is expected to rise to 3-3.5 per cent, with projected investments reaching approximately $150-170 billion.4
The consumer and retail sector, along with the technology domain, have emerged as primary magnets attracting private equity investments, highlighting the strategic alignment between the focus areas of private equity firms and the sectors expected to experience meaty growth as India's economic rise continues.
Foreign Direct Investment and Exits
Undeniably, private equity and venture capital investments have become a dominant source of foreign direct investment in the country, contributing around 64 per cent of the total FDI received over three fiscal years, concluding in March 2020. 5
The calendar year of 2023 saw the most private equity and venture capital exits in the history of Indian markets. About 78 companies witnessed private equity exits, totalling Rs 97,500 crore. In the same vein, the overall private equity and venture capital exits in India demonstrated significant year-on-year growth, rising by 36 per cent to reach $24.8 billion in 2023, up from $18.3 billion in 2022, leading to a strong upward trajectory in private equity/venture capital exits, which in turn ensures the sustained flow of capital. 6
In Q1 2024, private equity exits in India experienced a substantial surge, indicating a palpable shift in the investment landscape. Compared to Q1 2023, there was a striking 354.5 per cent increase in PE exits during the quarter. Additionally, the deal volume has grown more than fourfold in the last decade, from less than 200 deals in 2010 to more than 850 deals in 2023. 7
Furthermore, it is imperative to emphasise that the contributions of private equity and venture capital go far beyond financial capital. They have been instrumental in cultivating a culture of operational excellence and best practices within their portfolio companies. The hands-on approach, coupled with extensive industry expertise, has facilitated the implementation of robust governance structures, streamlined processes, and efficient management systems, positioning these companies for long-term sustainable growth. On top of that, according to some industry estimates, each $1 million invested by private equity and venture capital in India has effectively generated 47 new jobs.
Since InMobi became India's first unicorn in 2011, the country has witnessed an eventful journey in its startup ecosystem. In 2022, India reached a milestone of a hundred unicorns, indicating a significant increase in the alternate capital investment and entrepreneurship, with the government led Startup India initiative playing a crucial role in fostering this growth. Since its establishment in 2015, the Startup India initiative has introduced a range of policies, funds-of-funds, thematic funds, incubation programs, tax holidays, and tax benefit schemes.
Towards a Viksit Bharat
While there has been a noticeable decline from the peak investment levels reached in 2021, the downward trend aligns with the global normalisation of deal-making activity in the post- pandemic era.
Despite the current downturn, private equity investments in India remain substantial, demonstrating investors' steadfast confidence in the nation and its vast growth prospects. This resilience amidst global economic challenges is a resounding affirmation of the inherent robustness and firm belief of India's alternative capital ecosystem in the ideals of Viksit Bharat, the guiding philosophy during its Amrit Kaal era, contributing to an Indian economy that is inclusive, fosters innovation, and abounds with employment and entrepreneurial opportunities.
(This article has been written by Rajat Tandon, President, IVCA)
