Early stage PE investments take a hit, outlook bullish

Early stage private equity investments saw a sharp decline in the first four months of this year, but the outlook seems bullish as the government's initiative for startups is expected to boost investment in this space, experts say.

According to PwC, during January-April 2016, early stage PE investments saw a decline of 57% in value terms and 25% in volume terms.

Experts attribute the dip in startup investments to a mix of global macroeconomic factors such as a growth slowdown in China and concerns over massive losses incurred by startups.

"The slowdown is partly also attributed to companies waiting for stock market conditions to improve to secure better valuations. This year, investor caution has increased manifold, resulting in an acute slowdown in funding, fall in valuations and delayed deal closures," Sumchit Anand Managing Director-Acquisory India Consulting said.

Going forward, experts however, have a bullish outlook on this sector as the basic fundamentals which attracted investment in the start ups like consumerism, mobile and Internet penetration etc still remain "valid and bankable".

"We continue to be quite optimistic about the space. Clearly some new channels/platforms have been created which did not exist earlier. Having said so, further consolidation in the sector is likely," Sanjeev Krishan, Partner & Leader - Private Equity PwC said adding "there is still appetite for the sector, and some of the Indian HNI's have been providing seed/angel funding to start-ups."

Acquisory India's Anand believes "with the government initiative for startups and with the policy framework being reformed for Alternate Investment Funds (AIFs) and PE funding we expect the investment traction will remain in the long run, may go through temporary ups and downs!."

In the last two years, significant amount of funding went into the startup sector. But most businesses however continued to burn cash (a large part of which went towards customer acquisition) and required additional funding for operations which was not forthcoming.

"The investors took a pause and encouraged consolidation amongst their investees as multiple similar formats sprung up and bled cash," Krishan said.

According to Corporate Professionals' Partner & Head - Valuation & Deals Chander Sawhney, "the trend of investments has remained difficult and different in 2016. Many e-tailers have reported decline in number of orders significantly as they cut discounts leading to drop in their GMV and raising eyebrows on their fresh funding rounds and valuations."

"With three year tax benefits to new startups and exemption on capital gains benefits, many more investors are expected to join this space," Sawhney said adding that "VC's earn in 2 out of 10 investments and it's a high risk, high return space so Investments would follow in good companies".