After a record 2021, India’s private equity deals may witness slowdown this year: Bain&Co

After hitting a record private equity investments of $70 billion in 2021, the current year is expected to witness a tapering in the pace of deal activity in the Indian PE space as the gains of last year get consolidated, said a new Bain & Co, a global consultancy, report.

This report —India Private Equity Report 2022– highlighted expectations of the dampening of the vigorous exit activity of 2021, which saw exits grow 4x to $36 billion. This year has seen exit activity of $5.9 billion so far, a 56 per cent decline over the last year’s activity over a similar duration—and the exit activity is expected to weaken further. 

The bearish sentiment in public markets coupled with the younger portfolios of top funds could see exits dip to pre-2021 stages again, the report prepared in collaboration with Indian Venture and Alternate Capital Association (IVCA) showed.

Even though the pace of deals is slowing down, large funds continue to keep pace with their activity over the last year, vindicating confidence in the fundamentals of the Indian market, it added.

A post-Covid 4x acceleration in growth equity, coupled with larger cheque sizes across deals highlight the continued confidence in India’s growth story and a coming of age of the private equity ecosystem, the report said.

“In 2021, the Indian private equity ecosystem bounced back from 2020’s Covid-driven restraints, growing faster than most major economies, including China, with 96 per cent growth over 2020.” said Arpan Sheth, Partner, Bain & Company and co-author of the report. “This year, we anticipate a significant tempering of pace in investment activity as macro and micro trends converge, but see this as an opportunity for the consolidation of last year’s gains, which should make India witness annual PE-VC deal values of around $50 billion more frequently. India should seek to consolidate its position as the market of choice for investors as the investment and exit landscape demonstrates maturity.”

In the first half of the current year, even as the bullish sentiment waned, more than $24 billion of PE-VC investments in ~630 deals were recorded by May (vs. 775 for ~$19 billion in value by May 2021), riding on last year’s momentum. However, VC and growth equity have slowed significantly, with 20 per cent lesser deals this year compared to last year’s run rate of 130 deals every month. Average VC cheque sizes have also declined, and consumer tech activity is the hardest hit by this slowdown. Private equity however has maintained strength.

Investments: a heated market

2021 saw a record deal flow of $70 billion in over 2,000 deals, with an 87 per cent increase over last year’s volumes. The expansion in deal volumes has largely driven the growth in total deal value, with minimal contribution from deal size expansion. Indian investments grew by 96 per cent over 2020 (excluding the mega deals of Jio Platforms and Reliance Retail). Coupled with the flight of capital away from China due to political uncertainties, the growth helped India increase its share of the overall Asia-Pacific (APAC) market—in a signal of a trend expected to continue.

The number of large cheque size investments also witnessed a significant increase and the year saw 11 investments worth greater than $1 billion with Flipkart, Hexaware and Mphasis being the among the largest deals, compared to 6 in 2020. Much of 2021’s deal activity was in consumer tech and IT/ITES, an indication of the share of investments growth driven by the tech and internet sectors. The two sectors combined represented more than 60% of the year’s deal value, at nearly $44 billion–more than 2020’s overall investment value (ex-Jio and Reliance).

IT/ITES and healthcare expand

IT/ITES saw investments of $14.2 billion in 2021, growing by $10.3 billion or 255 per cent over the previous year. The sector’s attractiveness has picked up due to post-Covid shifts in business operations, the need for business continuity amidst uncertainties and a pivot to digitally-enabled models focused on improving unit economics. After Baring’s investment in Virtusa in a $2 billion deal in 2020, the year 2021 saw multiple deals of bigger ticket sizes, such as Carlyle-Hexaware, Blackstone-Mphasis, Advent-Encora and Baring’s investments in Hinduja Global Solutions and Straive.

“Indian IT is increasingly courting billion-dollar-plus deals, and the deal size and count is expanding with significant deals taking place in the sector in the last few years. While the valuations are tempering, deals in 2022 indicate that the sector will continue to get PE attention as Indian IT firms continue to demonstrate excellence,” said Sriwatsan Krishnan, Partner, Bain & Company and co-author of the report.

“In addition, IT has emerged as the most attractive sector for buyouts and witnessed some great exits by top funds”, he added. IT has accounted for nearly 40 per cent of buyout deal value, and almost 20 per cent of buyout deal volumes over the last three years.

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