Excess liquidity in US pushing PE/VC investment in India

Though, private equity and venture capital (PE and VC) investments in 2021 have gotten off to a slow start, with January-February 2021 investments being 11 per cent lesser than January-February 2020 and almost 66 per cent lesser than the previous two-month  period Nov-Dec 2020, it is expected to pick up in a bigger way in coming months with most of the uncertainties that plagued markets in 2020 on the decline.

The report from EY 2021 trend book suggests that looking ahead the deal pipeline remains robust and investment teams of most large and medium sized PE funds are working flat out diligencing and negotiating multiple deals.

"In our view, the global macro has thrust the India investment opportunity in a favourable position and most PE/VC investors are inclined towards investing increased amounts in larger deals," the report said.

While there are still concerns on the possibility of a second wave, new mutant virus strains and the complexity of the vaccine rollout, most Indian corporates as well as investors seem to have a positive view, EY said adding that the government too has  played its part well by way of an accommodative budget that is expected to spur growth on the back of increased govt spend and kickstart of the capex cycle.

The successful fund raising by the RIL Group entities from global PE and strategic investors during the peak of the pandemic has added a new dimension to India's attractiveness as a destination for global capital. Several large marquee global investors have made their maiden investments in India via the RIL Group deals and one can expect most of them to follow through with more investments as the Indian recovery picks up steam, the report said.

EY has identified factors that will play an important role in driving PE/VC investments in the future. In this regard it said that as global corporations look to mitigate risks by diversifying their supply chains, many new opportunities will open- up for Indian corporates, who will look to raise private equity capital to fund the new investments required.

Also, the pandemic has widened the chasm between large companies and the smaller ones. Differential access to resources will drive consolidation in most Indian sectors that have a long unorganized tail and create new and larger opportunities for both growth and buyout PE investors.

The report added that the trend of infrastructure and real estate investors coming into structures like InvITs and REITs is expected to further strengthen in the coming years with many companies/government entities making plans to monetize assets through  InvITs and REITs. Estimates suggest that already InvITs worth almost US$5 billion are in the pipeline.

Moreover, the tectonic shifts in India's digitization unleashed by the pandemic coupled with the sentiment boost driven by mega successful IPOs/listings of PE backed tech companies in the US are expected to keep Indian VC investors busy as new, hyper  scalable business models emerge and home grown technology companies look to list in the public markets.

EY said that to keep up with these fast-changing times, large companies and diversified conglomerates will review their product/business portfolios and sharpen their focus by carving out and selling business divisions/companies that are no longer considered core, creating more opportunities for buyout funds.

The years 2011-2020 was a pivotal decade for the Indian PE/VC industry during which the industry grew from a nascent asset class to a mature ecosystem, crossing many significant milestones. In this decade, PE/VC investments grew at a CAGR of 19 per cent  aggregating to a total of US $232.4 billion. A major portion of these investments came in the last four years, accounting for 68 per cent of all the PE/VC investments made during the decade, growing at a CAGR of 31 per cent.

Notwithstanding the sharp downturn in investment sentiment due to the Covid-19 pandemic, the decade ended on a record high of US $47.6 billion in PE/VC investments in 2020. This was largely on account of a flurry of mega investments in Jio Platforms and  Reliance Retail of US$17.3 billion. Without these investments, PE/VC investments in 2020 would have been lower by 36 per cent on a y-o-y basis. Though PE/VC investment activity rebounded in the fourth quarter of 2020 on the back of large stimulus programs by global central banks and hopes of return to normalcy with the successful development of vaccines for Covid-19, the pandemic has caused a significant shift in PE/VC investments from the traditionally 'in favor' sector