With the end to easy money policies putting global investors in a risk-averse mood, it was only to be expected that the gusher of private equity and venture capital (PE/VC) investments into India would witness a slowdown. Data from Indian Venture Capital Association (IVCA) and EY show that PE/VC flows into India between January-October 2022 at $42 billion, were down by about 30 per cent year-on-year. Monthly investments which hit a record of over $13 billion in October 2021 have been averaging $2.2 billion to $3.5 billion in the last four months. Deal volumes have moderated from over 100 investments a month until June this year, to about 70-80 lately.

To term this a ‘winter’ in private funding, as many commentators have done, would be over-stating the case. India averaged annual PE/VC investments of about $35 billion in the five years from 2016 to 2020. The advent of Covid and the unprecedented boost this gave to tech-enabled ventures of all shapes and sizes drove a big upsurge in activity in 2021. The froth seems to be dissipating now, with both PE/VC investors and their investee firms forced to turn their focus from superlative growth to positive cash flows, and a visible path to profitability. This moderation has hit some segments more seriously than others.

While PE/VC investors seem quite willing to commit funds of up to $50 million to bet on smaller early-stage and growth deals , they seem to be getting very selective about making larger commitments to late-stage ventures. This explains why many of India’s recently minted unicorns in segments such as e-commerce, food-tech and ed-tech have been on a belt-tightening spree lately, with mass layoffs and fewer freebies to consumers. Funding constraints have also increased public scrutiny of their lax governance practices. PE/VC interest also seems to be turning to sectors such as clean energy, healthcare and agri-business, as opposed to the Covid period fad for ed-tech, e-commerce and fin-tech. New-age firms launching heavily over-subscribed IPOs added to the private market euphoria in 2021. But with many of these over-priced offers biting the dust, PE/VC investors have been forced to rethink their bid valuations for recent deals. With start-ups yet to wake up to the ground realities, fewer deals are being inked.

While the above issues will need to be sorted out by market forces, policymakers have a role to play in making sure that the $50 billion of dry powder that India focussed PE/VC funds are said to be sitting on, does get deployed. In recent years, PE/VC investments have proved to be much more reliable source of capital flows for Indian firms than portfolio flows, accounting for nearly 60 per cent of inbound foreign direct investments. This makes a case for the upcoming Budget to give due consideration to pleas from the PE/VC industry for a level-playing field on taxation of unlisted versus listed securities, greater clarity on tax treatment of their fees and incentives for more funds to set up shop in India.