It was the year of the retail investor as Indian equity markets hit dizzying heights with the largest yearly IPO raise of over $16 billion, the highest in two decades. This category also helped the private equity/venture capital industry wrest a stellar number of successful exits. The number of PE/VC-backed IPOs in 2021 was the highest ever at 39.

Besides new-age sectors including fintech and e-commerce which attracted strong investor interest, the favourable market conditions also helped PE/VC investors list their holdings in automotive, healthcare and industrials at reasonably good valuations.

The exits were even sweeter for many PEs in the form of large returns as they rode the IPO frenzy in the Indian market. The year 2021 saw exits of $11.7 billion, a stunning contrast to $3.8 billion in calendar year 2020. This year’s exits surpassed even the pre-Covid exits of $9.9 billion in 2019.

The PE industry honchos now believe that the increased exits seen in 2021 will help larger fund raises by Indian general partners and bigger deployments by global PEs going forward.

Key factors

“The key reasons for higher number of exits via IPOs are strong capital markets and robust valuations that some of the companies have been able to achieve in IPOs”, said Pankaj Kalra, Senior Executive Director, Sales, Kotak Mahindra (UK) Limited.

The PE market has matured into a large and established segment in India with higher average deal size, more dry powder per firm, more domestic PE funds which, in turn, is attracting global funds to establish direct presence, says Kalra.

Clearly, financial sponsors, who are partially exiting and booking significant returns with stellar IPOs, are the new-generation buyers.

PE/VC investments stood at $58 billion (excluding exits) this year. Significantly, the total amount invested this year exceeds the combined value of investment in 2019 and 2020, excluding investments of $16.3 billion in Reliance Retail and Reliance Jio investments, according to data revealed by Kotak Investment Banking.

Of the total investment of $58.3 billion in 2021, as much as $15.9 billion was contributed by buyouts, $27.2 billion was from minority investments in digital and $4.2 billion was minority investments in enterprise tech. Buyouts have contributed to about 25 per cent of total PE deal value since calendar year 2018. Average ticket size of buyouts has increased to $630 million in 2021 from $ 170 million in 2018; and is prevalent across sectors.

Strong momentum continued in IT/ITeS, consumer tech, fintech and SAAS companies. More buyout funds have recently set up dedicated India offices — Brookfield PE, CVC, etc and are now active. NIIF is the largest Indian fund to join the PE fray.

Corporate Advisor Srinath Sridharan said, “2021 was a record-year for PEs, both in terms of number of exits that the Indian market provided them with, and that too with large returns. I anticipate that the year ahead — 2022 — will equally provide for more exits as well as stronger investable deal-flows. This is a validation of the Indian start-up ecosystem’s businesses scaling up and showcasing consumer engagement.”

Economic revival and digital transformation of multiple industries in India has provided an opportunity for long term sponsors seeking high valuation taking advantage of the momentum. As more and more sponsor-backed companies accomplish their IPOs, it would provide more opportunities for deal making through blocks and secondary PE to PE deals in the future, say PE industry players.

Start-ups surge

Indian start-up ecosystem is revving up with the surge in the number of the unicorns (firms with valuation of $ 1 billion) in the last two years. At the last count, India has about 79 unicorns, most of them having come up in the last two years. More PE/VC money is expected to pour into Indian Startups in 2022 if the current trend is anything to go by.

Sameer Nath, Managing Partner, TrueScale Capital, said “We expect 2022 to be a year of sustained venture funding as the India technology story takes further shape on the back of strong sectoral trends, continued economic recovery, and robust vaccination rates.”

Another trend one may see in 2022 if capital becomes more expensive is a shift in investor sentiment towards durable high growth business models with a visible path to profitability, he said.

Growth, late-stage, and public equity investors may begin to prioritise companies with sound fundamentals versus those pursuing ‘growth at all cost’, Nath said.

The increasing availability of domestic capital for the venture is another positive, he added.

Pranav Pai, Founding Partner and CIO, 3one4, said, “After a year of record liquidity and capital allocation, a correction will be expected down the line. However, resiliency is now part of the Indian startup DNA. After a difficult 2020 and having benefited from the uptick over 2021, most scale startups have stronger balance sheets and will be prepared to face the correction. Most will also take advantage of it to continue growing, defend their market share, and compete more intently.”

Add-on deals

One trend in 2021 that has caught everyone’s attention in the PE/VC ecosystem is the activity level on Add-on/bolt-on investments.

Put simply, an add-on acquisition refers to a company that is added by a private equity firm to one of its platform companies. Add-ons generally provide diversification within products or services. On the other hand, bolt-on acquisition refers to a company that is acquired by a platform company that is usually backed by private equity.

Since 2015, one has witnessed $26.5 billion invested by PE/VC funded companies or special platforms set-up by PE funds with an inorganic growth thesis, according to a recent EY-IVCA report.

Add-on/bolt-on investments have grown more than 10-fold from less than $1 billion in 2015 to almost $10 billion in 2021. On an average PE/VC funded companies did two add-on/bolt-on deals with a few exceptions that have done more than 10 deals, sometimes even 2-3 deals in a single year. The most notable among these include ReNew Power, BYJU’s, PayTM, Zomato, Quikr, Cardekho and Nazara, according to the EY-IVCA report.

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