What’s coming up for Private Equity in India in 2021–22?

Private Equity investment activity in India has remained robust over the last 5 years driven through a combination of traditional sectors like Financial Services, IT & Business Services, Healthcare & Life-sciences and more recently by new age businesses like e-commerce, Mobility, Education, Food, SaaS, Fintech et al.

In terms of exits, the period from 2015 to 2018 was one of the most active periods and was largely propelled by buoyant capital markets (IPOs, secondary placements) and partially by private market exits (M&As, trade sale).

However, if one looks at a slightly longer term data then it throws up some interesting numbers. The chart below depicts the aggregate Private Equity activity in India from 2006–2019 (actual) and 2020–2022 (projected) with investments, exits and net numbers for each year.

Some of the data points that are noteworthy from the time series. Aggregate investments for the period 2006–22 will amount to USD 339bn and exits at USD 171bn, thereby leaving a net balance stock of USD 168bn and USD 225bn at cost (end 2022). The ‘at cost’ number assumes that exited capital was returned at 1.5x gross MoIC at an industry level. If you assume the same MoIC as a benchmark for all capital, then the industry needs to deliver over USD 500bn in aggregate exits for all capital invested in this period.

Cumulative investments between 2017–19 add up to nearly USD 100bn and this pool of capital will come up for exit in the period 2020–23. The current year has also had decent investment activity driven by private investments in Reliance Group assets (Jio, Retail). However it has been muted period in terms of exits and hence will put additional pressure on the 2021–22 period for heightened exit activity.

In order to maintain the historical pace of exit, a cumulative USD 45bn of capital will need to be returned in the period of 2021–22. To put that in perspective, 2018 was the best year of exits for India at USD 33bn and was primarily attributable to the Flipkart-Walmart transaction (>USD 16bn). This was also the only year when more private capital was returned than invested on a net basis in the country. Flipkart will be an important person in the Indian history for multiple reasons!

So while the exit milestones are doable, some of the enablers for it to happen efficiently over the next couple of years will include:

1. Timely roll-out of overseas direct listing rules: The implementation of overseas direct listing will be a key determinant of the exits from the internet and digital ecosystem as these business would like to attract a broad base of institutional investors, and similar to those at NASDAQ. These investors will also be able to better appreciate the business metrics of the digital ecosystem.
2. Active Private Equity Secondaries market: Having raised over USD 80bn in 2019, Private Equity Secondaries has been one of the fastest growing alternative asset class globally. It has been used as an effective tool by LPs and GPs to generate liquidity for ALM. India has seen limited activity in the past, except for select deals like JP Morgan-Canaan, Coller Capital-ICICI Ventures and some direct portfolio deals by GPs like NewQuest and TR Capital. It will be important for secondaries activity to pick up materially over the next few years.
3. Strategic M&A Activity: We will need 4–5 mega exits for USD 45bn of capital to be returned in a two year period. This will have to be driven by few big ticket M&As, though repeating the scale of the Flipkart transaction may not be easy and hence the volume of transactions will an important determinant.
4. Buoyant domestic capital markets: Exit activity for the traditional sectors will be contingent on the state of domestic capital markets. It continues to remain the most attractive mode of exit especially from a pricing standpoint. The domestic capital market activity could also be driven by potential IPOs of Reliance Group assets and/or a couple of large unicorns.

So fasten your seat-belts as we are in for a lot of action for all stakeholders of the Private Equity industry in the 2021–22 period. It’s going to be an exciting period of rainmaking as we move to the new year and next decade.