The Indian private equity and venture capital sector is beginning to show some co-relation with the global industry. With PE/VC investments at 1.7 per cent of GDP, India is at the same level that China was last year, says VICA-EY’s latest report, 'The PE/VC Agenda: India Trend Book'.
India received $48 billion in PE/VC investments in 2019 across 1,037 deals on the back of large investments in infrastructure. This was 28 per cent higher than the previous high of 2018. Around 56 per cent of all PE/VC investments made over the past decade were received in the last three years, aggregating $111.7 billion. Around $87.5 billion of these investments have been in the form of primary capital contributing towards job creation, capacity addition, investments in technology and infrastructure.
PE/VC investments have emerged as a major source of FDI in India over the past three years accounting for 64 per cent of total infows received in the past three financial years.
Vivek Soni, Partner and National Leader for Private Equity Services, believes 2019 has been the best year for PE/VC investments in India. He says, "Notwithstanding the slowdown in the economy PE/VC capital has continues to flow into the country, eclipsing the highs seen in 2017 and 2018. The last three years saw $111.7 billion worth of long-term capital being invested into Indian companies, more than 80 per cent of which was from foreign sources. PE/VC has emerged as the largest source of FDI for India."
More than three-fourths of this capital inflow in the last three years has contributed to fresh capital formation, making PE/VC investments an important pillar of the Indian economy, helping in new job creation, enhanced capacities, new infrastructure, new business models, and disruptive technologies.
With the compression in global yields and increase in emerging market allocation by large global LPs and GPs, the macro favours India’s improving prominence as an attractive investment destination for private capital. "With a continuation of Government focus towards providing a stable and reform-oriented policy and tax regime, we continue to have a positive outlook for the Indian PE/VC sector,” say Soni.
Over the past three years, PE/VC investments in India have grown at a CAGR of 44 per cent. Cumulative investments received during this period are almost equal to the investments received in the preceding 10-year period between 2007 and 2016. Post the 2008 global financial crisis (GFC), India received investments worth $198 billion between 2009 and 2019, of which the last three years (2017 to 2019) have accounted for 56 per cent.
Similarly, PE/VC exits too have had a good run over the past three years. In each of the last three years, PE/VC funds have clocked exits of over $10 billion. From 2009 to 2019, Indian PE/VC exits aggregated $82 billion, of which 63 per cent were made in the last three years. Even after adjusting for the one-off Flipkart-Walmart deal which saw its early investors notch up a $16 billion exit, exits over the last three years have accounted for 43 per cent of the aggregate value of all PE/VC exits between 2009 to 2019.
The contribution of PE/VC capital to the overall Indian economy has also increased significantly from levels of around 0.7 per cent of GDP in 2016 to its current level of around 1.7 per cent.
EY expects some moderation in the growth of investments from about 44 per cent in 2017-2019 to about 15 per cent-20 per cent in 2020 as investors have become a little circumspect and also because of the large base effect of $48 billion invested in 2019.
Notwithstanding the decline in GDP growth estimates by various sources, in the global context, India is expected to remain an important destination for PE/VC investments and as yields in OECD countries continue to decline, asset managers are expected to increase allocation to emerging markets. India is likely to be an important beneficiary of this shift.
On the downside, substantial uncertainty on account of global factors like US-China trade issues, pandemic concerns around China-origin Coronavirus and its potential impact on global supply of goods and services are expected to act as significant headwinds. Domestic issues like slowdown in growth, lack of liquidity and credit expansion are projected to continue well into 2020. The response of the PE/VC investor community in the wake of these downside risks is likely to be influenced by pro-active steps that our government will take to ensure policy stability and continuing reforms.