PE investments in India to reach $40 billion by 2025

With private equity (PE) investors confident of a revival in the investment cycle and to contribute to the growth of the Indian economy, it is expected that over the next 10 years PE investment in India will reach $40 billion by 2025.

According to PwC’s report PE in India 2025 -A 40-bn-USD decade beckons?, the next investment cycle will represent a more mature phase of investing in the country.

The PE industry is also expected to consolidate with perhaps 70 to 80 significant players. While venture and growth opportunities will continue apace, the industry believes that buyouts will be biggest investment theme over the next decade as India Inc deleverages and exists non core businesses, said the report.

“Consumer centric businesses have been big themes for equity investors over the last few years. While this will continue, Indian consumerism is expected to embrace the rural markets as well over next five years, as growth reaches the interiors of the country,” said Sanjeev Krishan, leader – private equity, PwC India.

Investments will see a spur in the infrastructure and manufacturing sectors over period of time. “PE investors are also eager to support solid Indian companies, with a proven local presence, to expand in overseas markets”, he added.

The report findings also state that funds have increased their emphasis on diligence today as never before.

The diligence has become intensive with much focus on getting to know the sector well, which means speaking to other operators in the industry, point of view discussions and learning from previous experience of investors in the sector.

Referring to the challenges, the report points out that clarity and stability in the fiscal and tax regime are the most critical factors for attracting foreign capital in the country. Another feature is poor corporate governance, which worries the PE industry when evaluating targets. However, investors see the emergence of better governance going forward. They believe that there is an increasing realisation among the promoter community that better corporate governance will ensure certainty of deal closures and in shorter time periods.

Fund raising is another aspect which has been challenging for General Partners (GPs) in recent times. However this is expected to change as LPs regain confidence in the Indian market. Most of the respondents felt that while increased direct LP investing is likely in the near term, it is unlikely to be a norm. LPs may however co-invest with GPs in a number of cases.

On the exits, most respondents believe that as the investment climate in India turns business friendly, strategic investors, both overseas and domestic, are most likely to provide them exits.

A number of early stage investments will continue to find financial buyers, and provide ’secondary’ exits.

While a number of respondents believe that IPOs will stage a comeback and provide an opportunity to exit some of their existing investments, most of them consider an IPO exit challenging as timing becomes very critical in an IPO exit, and this is not entirely in their control.

The report is based on the input from over 40 partners and Principals in PE houses.