BS BFSI Summit: PEs on way to become mainstream in India: Industry leaders

Private equity firms are now the largest source of FDI in India, with rising domestic capital and strong exit markets pushing the sector toward mainstream status, top fund managers said

Private equity (PE) firms have emerged as the largest contributors to foreign direct investment (FDI) in India and are playing a significant role in job creation, senior industry leaders said on Thursday. 

“For PE specifically, India remains underpenetrated. It has been the fastest-growing large economy in the world for the past three years, and we expect it to be a global driver of PE demand,” said Hari Gopalakrishnan, partner, head of India and co-head of services at Swedish PE firm EQT, during a panel discussion moderated by Nivedita Mookerji of Business Standard. 

Gopal Jain, managing director (MD) and chief executive officer of Gaja Alternative Asset Management, the first PE firm planning a listing in India, said the country now has enough data and a clear trend to show that PE is on its way to becoming a mainstream sector. 

“For many years, India has been the fastest-growing alternative market in the world, though that’s partly because we started from a small base. PE still punches below its weight,” said Jain. 

Currently, he said, banks, insurance, and mutual funds dominate the mainstream financial sector. “We have $2.5 trillion in bank deposits in India. In comparison, PE within the alternative investment fund (AIF) space is just a small fraction. But now, alternatives are well on their way to becoming mainstream,” Jain added.

 

Abhishek Kabra, MD of Samara Capital, highlighted that over the past 25 years, PE has outperformed public markets globally by 6.7 per cent. “If you look at 10-year rolling returns, it’s a proven form to invest, park capital, and generate returns,” he said.

 

“In the past four years, we’ve seen three years where global PE investment reached $2 trillion annually. It is certainly mainstream at the global level. In India too, we are seeing an increase in deal flow, a vibrant ecosystem, and a growing domestic pool of capital available to AIFs and fund managers. Among ultra-HNIs and family offices, about 7-8 per cent of allocations currently go toward AIFs,” Kabra said, adding that share is expected to rise to 15-16 per cent.

 

Manish Kejriwal, founder and managing partner of Kedaara Capital, acknowledged that “around 2010, PE firms almost didn’t deliver returns to their LPs,” but said the situation has transformed with stronger exit opportunities through IPOs and sponsor-to-sponsor deals.

 

“The IPO markets are obviously a very important component, and we now have sponsor-to-sponsor sales as well. We are in the process of selling a few companies. We’ve already taken nine companies public, and it’s a very robust exit market. Unless we return capital to our LPs, they won’t reinvest in India. That’s the fundamental change that happened in the past decade. The IPO markets have played a major role in that,” Kejriwal said.

 

Gopalakrishnan added that global market uncertainty is shifting investor focus to Asia and India. “If you look at Asia, again, India is one of the fastest-growing countries. And so global investors are looking more to Asia for growth. Within Asia, India is a bright spot. Incrementally, I would expect India to grow ahead of everybody else. But it's also of a small base,” he said.

 

Jain highlighted that India is now the world’s fifth-largest economy, while the US, Japan, Europe, and China currently account for 90-95 per cent of global PE activity.

 

“Now that India is a large market, and with large markets comes a large economy, a large IPO market, large supply of entrepreneurs, large consumption base, all of that, private equity is set to grow and catch up to where it should be in the economy. In India, private equity punches below its weight because private equity worked only in part for the last 30 years --- the last five or six years. It started to work better, and has started to produce returns,” Jain said.