Stage set for PE majors to make a splash in India's tech startup gold rush

Indian tech startup ecosystem has attained a threshold of maturity in the last few years which makes it attractive for large PE players

As the meltdown in tech stocks leads to tempered valuations of growth equity in the startup ecosystem, industry insiders say private equity majors will be scouting for opportunistic deals in the segment over the next few quarters.

“Most of the unicorn deals announced in the March quarter were either finalised or at the closing stages by the end of 2021. With large venture capital players like SoftBank and Tiger Global taking a backseat, the stage is set for PE giants such as KKR, Temasek, Carlyle to make a big splash,” said a partner at a VC firm with several billion dollars in assets.

With a record $36 billion of investments, 2021 was a blockbuster year for technology start-ups in India in segments such as e-commerce, fintech and software-as-a-service, among others. And, as the Big Four partner indicated, a part of that enthusiasm boiled over to the first quarter of CY22 as over $10 billion of funding was registered during the period. 

This gold rush of cash for startups in the last year and a half has largely been on account of investments by VCs like Tiger Global, Falcon Edge, SoftBank and Sequoia who took part in dozens of funding rounds across early, growth and pre-IPO stages. 

However, it is not that the traditional PE players have passed on all opportunities that came their way. They stepped up focus on growth equity deals in 2021, with the marquee investments being the Warburg Pincus-led funding in The Good Glamm Group, ChrysCapital’s investment round in Dream11, and the KKR-led investment in Lenskart.

“We expect the secondary market will continue to see interest especially as traditional PE funds look to build portfolio in growth equity assets even as public listings may see some caution given macro headwinds and compressed multiples in the global capital markets,” said Sai Deo is an associate partner in Bain & Company’s Private Equity practice.

According to Siddarth Pai, managing partner of VC firm 3one4 Capital, the Indian tech start-up ecosystem has attained a threshold of maturity in the last couple of years which makes it attractive for large PE players.

“The PE majors usually like to come in when a company is valued in the bracket of $200-400 million so that they can make an exit four or five years down the line at a valuation of $2-2.5 billion through a public listing. And the funding rush of the last 1.5 years has ensured that there are many such start-ups who fit the bill currently,” said Pai.

“They have generally been restrained with the tech start-up sector because of their investment discipline – focussing on fundamentals like cashflows and profitability as their exits are typically geared towards the story playing out in the public market,” he added.

Experts are of the opinion that while tech stocks have been pummeled in the past few months and the buzz around initial public offerings in the sector has died down, it won’t be long before the sector bounces back in the share market.

“Large PE investors will appreciate that the condition of the tech stocks globally is a temporary phenomenon. Around 60-70 per cent of the investments last year were in growth deals of $50-million-plus cheque sizes. Such investments have an exit horizon of a few years and are not likely to suffer anyway,” said Amit Nawka, partner, deals and start-ups leader, PwC India.

“Of course, valuations will be a bit muted. If somebody with Rs 100 in revenues raised funds at a valuation of Rs 1,000 last year, they might find out that a 2x growth in revenues to Rs 200 only fetches a 20 per cent rise in valuation to Rs 1,200,” he explains.