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Gagandeep Bakshi, Director, Intellecap Investment Banking Group
it’s a big YES but it’s not going to be easy. As we prepare for the 3rd wave of COVID-19, India’s economy continues to face distress. According to the ILO, more than 400 million people in India are at risk of falling deeper into poverty. While the government has taken various fiscal measures to support recovery and resilience, private capital also has an important role to play.
We’ve seen a lot of tech start-ups grow in the COVID-19 world and VCs have their hands full as well. The odd-job economy and e-commerce sectors hold promise for job creation, but they must continue to raise capital to support negative cash flow. It has been a daunting task for many to stay afloat. India ranks 3rd among the world’s unicorns after the United States and China with a combined valuation of $ 116 billion for 35 companies. With over $ 35.7 billion in total funding, Indian unicorns are also the biggest job creators and employers in the Indian startup ecosystem. About 70% of these unicorns are in deficit. Given the current global crisis, a financial collapse would be catastrophic for India’s top unemployment rate. This is where our traditional sectors bring longevity and resilience to the economy.
Unfortunately, in these difficult times, private equity transactions in the middle market have been down about 32% from the year before COVID-19. We also saw a ~ 50% drop in traditional sectors that support employment and capital flows. This can be corroborated by 2 key data points – First, much of the capital has moved away from traditional businesses towards COVID-friendly technology and healthcare opportunities to insinuate the “new normal”. Second, control / buyout deals have seen increased traction compared to mid-range deals. Private equity funds focused on mid-market opportunities have seen their appetite for risk diminish with many uncertainties associated with this pandemic. On the other hand, sovereign wealth funds with much longer investment horizons have also seen their risk appetite diminish as they have chosen to make co-investments rather than direct investments.
We are seeing some interesting trends that may explain some of the gaps that need to be addressed.
Our country has an exhausting number of risk-taking private equity funds, including sovereigns on one side and a bunch of dry powder on the other. According to a report released by the Indian association PE & VC and Bain & Company, there was $ 8 billion of dry powder available with funds in 2020.
Buyouts have grown significantly by almost 10 times over the past decade
The share of growth deals ($ 10-50 million) or the missing link (between VCs and large PE / buyout funds) has declined over the past decade
· Significant increase in the proportion of transactions> $ 100 million as a percentage of all transactions by value compared to transactions of $ 10 million to $ 50 million. It also shows that private equity funds increasingly prefer larger note transactions in mature companies, leaving a growing void in SMEs for middle market transactions.
So what will help isolate our economy and businesses from these black swan events:
More mid-market private equity funds that can support traditional SMEs
· Mainstreaming impact is now becoming a reality and we need it to happen soon. Limited Partners now have a wide range of options to deploy their capital and General Partners use impact to differentiate themselves and create value. TPG, Bain Capital, KKR, Partners Group and others have created dedicated impact vehicles
We need our own DFIs – not one but a few that focus on specific themes and support businesses throughout their lifecycle
· Need for greater participation in the national capital of pension / retirement funds in private equity funds. Like non-government funds, pension funds and bonus funds can now invest up to 5% of their investable surplus in Category I and II AIFs registered with SEBI, this not only ensures the financial stability of the Indian startup ecosystem, but also builds trust. from the Indian market
Lastly and most importantly, we need a lot more risk takers who can continue to trust and invest in businesses even in tough times
Source:
The rise of Private Equity in India over the past decade (EY)
Private equity investments in India hit record high in 2020 (Reuters)
Why India needs a Bharat fund beyond the existing VC ecosystem (Economic Times)
· When will private equity investments resume in India? at least even more waiting (Financial Express)
After COVID-19, 5 Ways India Can Pursue a Sustainable and Resilient Recovery (WRI)
Impressive Valuations But No Signs of Profit: The Story of Indian Unicorns in 2020 (Inc42)
Why large private equity firms should consider launching an impact investing vehicle (The Bridgespan Group)
Allow private pension funds to invest in AIFs (Investindia.gov.in)
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