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Press release

18 Feb 2020 Mumbai, IN

PE/VC investments form a major source of FDI in India, ~77% of these investments contributing to fresh capital formation

Mumbai, 18 February 2020: PE/VC investment, the single largest source of FDI in India. 77% of these investments contributing to fresh capital formation. India received US$48 billion in PE/VC investments in 2019, 28% higher than the previous high of 2018.

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Related topics Private equity
  • India received US$48 billion in PE/VC investments in 2019, 28% higher than the previous high of 2018.
  • 56% of all PE/VC investments made over the past decade were received in the last three years, aggregating ~US$111.7 billion.
  • US$87.5 billion of these investments have been in the form of primary capital contributing towards job creation, capacity addition, investments into technology, infrastructure etc.

Mumbai, 18 February 2020: As per IVCA-EY’s latest report, the “PE/VC Agenda: India Trend Book”, the Indian PE/VC industry is beginning to show co-relation with the global PE/VC industry. With PE/VC investments at ~1.7% of GDP, India is at similar levels that China was last year. In 2019, India received PE/VC investments worth US$48 billion across 1,037 deals on the back of large investments in infrastructure. PE/VC investments have emerged as a major source of FDI in India over the past three years accounting for ~64% of total FDI received in last three financial years ending March 2020.

Vivek Soni, Partner and National Leader for Private Equity Services, says, “2019 has been the best year for PE/VC investments in India. Notwithstanding the slowdown in the economy PE/VC capital has continues to flow into India eclipsing the highs seen in 2017 and 2018. The last three years saw ~US$111.7 billion worth of long-term capital being invested into Indian companies, more than 80% of which was from foreign capital. PE/VC has emerged as the largest source of much needed FDI for India.

More than 3/4ths 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 creation of new jobs, enhanced capacities, new infrastructure, new business models, disruptive technologies etc.

With the compression in global yields and increase in emerging market allocation by large global LP’s and GP’s, the macro is in favour of 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.”

After two consecutive record-setting years, Indian PE/VC investments have notched another new all-time high in 2019, crossing US$48 billion. Over the past three years, PE/VC investments in India have grown at a CAGR of 44%. Cumulative PE/VC investments received during this period are almost equal to the investments received in the preceding 10-year period between 2007 to 2016. To put the numbers in context, post the 2008 global financial crisis (GFC), India received PE/VC investments worth ~US$198 billion between 2009-2019, of which the last three years, from 2017 to 2019, have accounted for 56%. 

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 US$10 billion. From 2009 to 2019, Indian PE/VC exits aggregated ~US$82 billion, of which 63% 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 US$16 billion exit, exits over the last three years have accounted for 43% of the aggregate value of all PE/VC exits between 2009 to 2019.

PE/VC as a source of FDI in India

Over the past four to five years, PE/VC investments have emerged as an important source of capital for the Indian economy and are now almost equal to ~1.7% of the Indian GDP. This is the level China was at in 2018. As the Indian PE/VC industry moves towards global averages, it is mimicking some of the global trends, such as buyout gaining prominence, deals becoming larger and more complex, and large global LPs increasingly making direct investments. The contribution of PE/VC capital to the overall Indian economy has also increased significantly from levels of around 0.7% of GDP in 2016 to its current level of around 1.7%. 

PE/VC investments as a % of GDP

 

2016

2017

2018

2019*

Global

1.7%

1.7%

1.8%

1.7%

United States

3.3%

3.2%

3.6%

3.2%

China

2.0%

1.5%

1.7%

0.7%

Europe

1.8%

2.1%

2.2%

2.2%

UK and Ireland

3.5%

5.5%

4.1%

4.5%

DACH (Germany, Austria, Switzerland)

1.2%

0.9%

0.8%

1.7%

France and Benelux

2.7%

2.3%

2.4%

2.6%

India

0.7%

1.0%

1.4%

1.7%

PE/VC investments as a % of GDP

 

2016

2017

2018

2019*

Global

1.7%

1.7%

1.8%

1.7%

United States

3.3%

3.2%

3.6%

3.2%

China

2.0%

1.5%

1.7%

0.7%

Europe

1.8%

2.1%

2.2%

2.2%

UK and Ireland

3.5%

5.5%

4.1%

4.5%

DACH (Germany, Austria, Switzerland)

1.2%

0.9%

0.8%

1.7%

France and Benelux

2.7%

2.3%

2.4%

2.6%

India

0.7%

1.0%

1.4%

1.7%

A significant portion (over 80% approximately) of this PE/VC capital being invested in India is of foreign origin, either in the form of foreign global GPs investing from their global/regional funds or in the form of foreign global LPs contributing capital to various GPs active in India/investing directly in India. With many of these large global LPs increasing their direct investments and deploying larger sums of money in each round of funding that they participate in, the flow of foreign capital is expected to accelerate.

An in-dept analysis of the investment data shows that almost 77% of all PE/VC investments have been in the form of primary capital being deployed towards capital formation. This translates to an estimated US$87.5 billion of funding towards creation of new jobs, capacities, technologies, infrastructure, credit, etc. which has a material collateral impact on affordability of better health services, education, development of human capital and increase in the attractiveness of India as an investment destination. 

Over the past few years, the rising PE/VC investments into India has positively impacted the country in many ways. Some of them are:

  • Since its early days, PE/VC investments have acted as a tailwind to the Indian entrepreneurship culture providing the much-needed growth capital across industries. PE/VC funds have invested in over 5,000 companies providing capital at various stages from seed to growth.
  • These investments have supported capital intensive industries like wireless telecom and renewables right from their early years. These industries owe a large part of their current size and scale to timely investments made by the PE/VC sector.
  • Off late, private equity has been one of the main catalysts behind the growth of new-age tech-enabled businesses in India ranging from e-commerce, fintech, healthtech, edtech to online streaming media and delivery and logistics platforms that have created several jobs and helped develop a new ecosystem. A large part of the boom in sectors like e-commerce, payments, hyperlocal delivery, etc. can be attributed to the PE/VC sector that helped these early-stage companies with their cash burn while they focused on changing consumer behavior and driving rapid consumer adoption.

Outlook for PE/VC

  • The last three years have been impressive for India in both investments as well as exits. However, we are projecting some moderation in the growth of investments from about 44% in 2017-2019 to about 15%-20% in 2020 as investors have become a little circumspect and also because of the large base effect of US$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.
  • The momentum in buyout deals is expected to continue with financial services, IT, e-commerce, retail consumer finance, and healthcare reaming the key sectors of interest. Infrastructure and real estate should continue to attract strong interest from real asset economy investors. 
  • Spurred by the dislocation in the credit markets, we expect most fast-growing private companies to be open to doing growth equity trades with PE/VC investors.
  • We also expect 2020 to be a good year for exits because of the build-up of a huge stock of small- and mid-cap companies over the past 18 months, where private equity has a substantial stake.
  • We believe 2020 is going to be another big year for infrastructure and real estate sectors, which accounted for almost one-third of all the private capital invested into India in 2019. We hope that international yield seekers will come to India to invest in highly-rated asset-backed cash flow opportunities as corporates, investors and even government-controlled entities owning infrastructure asset portfolios look to monetize their assets via InvITs.
  • 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.

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