Historically the Indian Financial Markets have had certain hot investments that everyone wants to invest in. For the longest time, it was Gold, then came Real-Estate and Cryptocurrency. But the last decade was dominated by Private Equity and Venture Capital Investments. These investments have flooded the markets with billions of dollars, funding innovative ideas, honing entrepreneurial skills and creating a multitude of wealth for those brave enough to make these risky investments.
History of PE/VC in India
Preceding 1997, the Indian private value market was tiny and generally dependent on official financing from the Government and multilateral organizations like World Bank, IFC, CDC and DFID. The growth was seen during beginning of the dotcom boom with the entry of foreign institutional financial backers (FIIs) VC financing was first introduced in India during the year 1975 with the setting up of Industrial Finance Corporation of India (IFCI) supported Risk Capital Foundation (presently known as IFCI Venture capital Fund
Limited). In 1976, a seed capital plan was presented by The Industrial Development Bank of India (IDBI). In March 1987, IDBI introduced a venture capital fund scheme for financing ventures seeking development of indigenous technologies/adaptation of foreign technology to wider domestic applications. Similarly, ICICI in association with UTI formed a venture capital subsidiary Technology Development and Information Company of India (TDICI) for financing technology oriented innovative companies. In mid-80’s all the three Indian financial institutions viz IDBI, ICICI, IFCI started investing equity in small technological companies.
Let’s breakdown the growth on PE/VC into multiple Phases:
|Phase -I Pre – 1995||Phase – II 1995-1997||Phase – III 1998-2001||Phase – IV 2002-2009||Current 2010-2021|
|Number of Active PE Funds||8||20||50||75||3000 +|
|Total Investments (US$ Mil)||~30||~125||~3,000||~7,000||~240,000|
|Stages & Sectors||Seed, early stage and development – diversified||Development – diversified||Early stage and Development – telecom and IT||Growth/ Maturity – tech, financial services, infra and industrials||Growth/ Maturity/ Credit/ Distress/ Buyout/ Platform – financial services, infra, RE, tech, healthcare, consumer|
|Primary Sources of Funds||World Bank, Government||Government||Overseas Institutional||Overseas Institutional||Overseas Institutional/ Domestic|
|No. of Transactions||~20||~65||~548||~1,500||~7,000|
The Last Decade (2010 – 2020)
This decade saw PE/VC investments develop at a CAGR of 19% from a base of US$ 8.4 billion out of 2010 to US$ 47.6 billion every 2020 and spread its wings across all venture classes. The combined worth of PE/VC investments between 2011-2020 added up to US$ 232.4 billion, which is over two times the worth recorded in the previous decade. This decade saw numerous changes in the Indian PE/VC industry concerning the deal type, deal size, and industries.
Top Large PE/VC Deals between 2010-2020
Brief Analysis of Sectoral Performance (2010-2020)
The PE/VC investment activity in India has been dominated by four-five sectors that accounted for 2/3rd of all investments by volume and value. Some of the key trends were as follows:
- Technology has been the most preferred sector over the years.
- While e-commerce sector was among the preferred sectors throughout the decade, the deals were much smaller in the initial years.
- Financial services and real estate have consistently been among the top five preferred sectors for PE/VC investments.
- Infrastructure sector has received a disproportionate share of capital despite very few deals over the decade.
- Media and entertainment sector has seen an uptick in deal activity in recent years, though the deal sizes are rather small.
- Healthcare was among the preferred sectors in the initial years but fell behind in the latter half of the decade. This is expected to change after the Government’s focus on increasing healthcare investments and renewed interest from PE/VC funds in the healthcare sector post the pandemic.
Outlook for the Next Decade
- Technology enabled businesses will see disproportionate share of investments:
As technology takes over all parts of business and life, it has turned into a significant tool for disturbing the status quo. Considering recent patterns, early movers in technology-empowered organizations are relied upon to get a disproportionate share of the market. Accordingly, organizations that are at the cutting edge of innovation will doubtlessly have an upper hand, and PE/VC reserves are understanding that. The previous year has shown us the sort of valuations techempowered business can order, and their capacity to be stronger to financial shocks.
- Environmental, Social, and Corporate Governance (ESG) focused investing:
Investors are using these non-monetary variables as a component of their analysis to distinguish risks and opportunities. The Covid pandemic, specifically, has escalated conversations about the interconnectedness of sustainability and the financial system. Many funds have already
incorporated ESG policies in their investment decisions, a trend which will grow stronger in the next decade. Indian PE/VC investors will in time, be expected to make ESG an integrated part of a company’s DNA and its operations.
- New sectors to emerge as frontrunners for PE/VC investments:
Most conventional areas are being upset by innovation and new business models have arisen. The most conspicuous among them for the following decade appear to be edtech, fin-tech, health tech, EVs, independent transportation and customised media and amusement. These sectors will play an instrumental role in the upcoming decade.