At $26.3 bn, PE investment in India in 2018 was second-highest in a decade

Fundraising across Asia-Pacific slowed down, with China tightening rules for PE investment, but India-focused dry powder remained healthy at $11.1 billion

The private equity market in India remained a hotbed for deal-making in 2018, with a total of $26.3 billion coming in investments across 793 deals. This was the second-highest in a decade in terms of deal value, according to Bain & Company’s ‘2019 India Private Equity Report’, released on Tuesday in partnership with Indian Private Equity & Venture Capital Association.

Private equity funds continue to prioritise deal quality over quantity, with the top 15 deals comprising about 40 per cent of total deal value and the number of deals greater than $50 million increasing from the previous year, Bain & Company said in a media release. 

The market for exits remained strong as well, with 265 exits valued at nearly $33 billion in 2018, signaling investor confidence in the Indian market. Nearly half of last year’s exit value resulted from the $16 billion sale of Flipkart to Walmart. However, even excluding that, 2018 was one of the best years for exits in the last decade.

Fund raising across Asia-Pacific slowed down, with tightening rules on PE investment in China, but India-focused dry powder remained healthy at $11.1 billion. The number of active funds increased to 491 during 2015-17, from 474 in 2014-16

Arpan Sheth, partner, Bain & Company and one of the lead authors of the report said: ‘‘The Indian market signaled investor confidence with the year 2018 proving to be one of the best years for exits in the last decade… Many more exits are expected during the next few months.’‘ The public market remained the most preferred mode of exits.

Consumer tech and banking, financial services and insurance (BFSI) remained the largest sectors for investment by value. While consumer tech investment was large at $7 billion, it shrank from more than $9 billion in 2017. BFSI also remained dominant with almost $5 billion of investments in 2018, driven by a rising class of non-banking financial companies (NBFCs) that continue to flourish in the ecosystem. 

The notable large investments in 2018 across the two sectors, included investments in HDFC Bank, Star Health and Allied Insurance, Swiggy, OYO Rooms, Paytm and Byju’s. The market also witnessed increased investment activity in consumer/retail, with multiple deals in food (Ching’s Secret, Gemini Edibles) and apparel (V-Bazaar Retail).

The average deal size in 2018 remained flat. Small-ticket deals of less than $25 million fell, as did those for transactions greater than $100 million. The average deal size in consumer tech fell 30 per cent, due to the absence of large ‘‘Flipkart-like’‘ deals (such as SoftBank’s investments of $2.5 billion in Flipkart and $1.4 billion in Paytm) which had pushed up average deal size in 2017.

There was also an increase in deals with majority ownership and late-stage investments and buyouts. In the coming months, funds expect further investment activity in BFSI and consumer/retail, even though the valuations are still perceived to be high. Healthcare has also seen a lot of interest, with funds eyeing players across pharmaceuticals, equipment, single-specialty hospitals and clinics, and diagnostics and others. Technology space will be driven by rapidly growing enterprise tech (SaaS) companies that operate out of India and sell globally.

In terms of fund-raising, buyout funds continued to draw the biggest share of capital. However, after a few strong years, fund-raising has slowed across the region. Only 14 per cent of funds raised globally were focused on the Asia-Pacific in 2018, compared with 23 per cent in 2017.

New asset classes like Alternate Investment Funds (AIFs) and distressed-asset management have increasingly gained traction in the Indian market, aided by government regulations and tax breaks. Funds raised by AIFs more than doubled to $5.5 billion in 2017, from $2.4 billion in 2016, and are likely to exceed $7 billion in 2018. 

The number of AIFs registered in India almost doubled from 268 in 2016 to 518 as of February 2019. Fund-raising will continue being a key priority for many investors in India, although most expect it to become more challenging in the next 12 months.

‘‘It was an excellent year for PE in India. While investment value reached the second highest level of the last decade, exit values were the highest in the last decade, which points to investor confidence and maturity of the Indian PE landscape,’’ said Sriwatsan Krishnan, partner, Bain & Company and a co-author of the report.

A few large exits dominated in 2018, with the top 10 exits accounting for 70 per cent of total exit value. Apart from Flipkart, these included Intelenet Global Services Pvt. (Blackstone), GlobalLogic (Apax), Star Health and Allied Insurance (multiple funds) and Vishal Retail (TPG). The public market remained the most preferred mode for exits, though there was a spike in strategic exits, primarily driven by consumer tech.