The third wave of Covid-19 and commencement of monetary policy normalisation by the US Federal Reserve and other global central banks appears to have impacted global private equity and venture capital funds investing in to India in recent months. This is reflected in the deal value as well as number of deals of PE and VC investors in India moving lower since the highs recorded in October 2021.
The value of PE/VC deals in October 2021 was $13,117 million spread across 132 deals, according to the IVCA-EY monthly roundup. With the Indian economy showing strong signs of revival from the second wave of Covid-19 and the start-up-eco-system, especially the fintech segment booming, global investors made a beeline to India in the July to October 2021 period. Also the Chinese government’s crackdown on edtech start-ups weighed in India’s favour in that period.
But talks about the global central banks beginning interest rate hikes and sucking out the liquidity surplus from the global financial markets seems to have dampened these investments. The lockdowns announced in India in January to combat Omicron variant depressed sentiments further. The deal value of PE/VC investors in January 2022 was 65 per cent lower when compared to October 2021; the value was 56 per cent lower in February 2022.
“There is definitely, a significant slowdown in the funding frenzy,” says Anirudh A Damani, Managing Partner, Artha Venture Fund. “Founders are getting asked tough questions. Especially when they see how certain start-ups have (mis)invested the investor capital over the last 6-9 months. Most importantly, the next round of investors are going back to the basics; asking founders to show them sustainable positive unit economics and a business model that can sustain without external cash backing of the investors.”
Number of deals slow
In terms of number of deals too, there is a slowdown. While average number of PE/VC deals was 135 between July and October 2021, it fell thereafter. Average monthly deals was 119 between November 2021 and February 2022. Interest in real estate sector appears more resilient with deals worth $565 million signed in February 2022. But infrastructure sector found fewer takers with no deals signed in January and deals worth just $114 million signed in February this year.
Investments in start-ups account for the largest portion of PE/VC investments. But value of money invested in to start-ups has also reduced in recent months. While start-ups received average of $3553 million between July and October last year, the average investments between November 2021 and February 2022 moved around 20 per cent lower.
Exits also become harder
With sentiment in equity market getting hit due to stagnation in equity prices, PE/VC exits also slowed down in the December 2021 to February 2022 period. Number of exits were highest in May 2021, with exit deals valued at $11,956 million across 17 deals. While August 2021 and October 2021, too, recorded decent number of exit deals realising good sums for investors, the value of exit deals have dropped significantly since December 2021, with monthly average of $1,000 million.
The outlook could remain challenging for these investments going ahead. “Uncertainty remains high and faster than anticipated interest rate tightening by the Fed, rising inflation and commodity prices amidst geo-political tensions, alongside a resurgence in COVID infections continue to remain potential risks to watch out for,” says the IVCA-EY report.
“The market has shifted from a founder’s market to a funder’s market and founders have to get used to the sudden adjustment,” adds Damani. “For experienced founders, this is a cycle they have to sustain, because if they make it through - they will make bank when the tide changes.”
(with inputs from Yatti Soni, Bengaluru)