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Doubling down on demographics

Private equity fundraising more than doubled in India last year. As it becomes the world’s most populous country, global private equity sees growth in supply chain manufacturing and tech.

This article first appeared in the February 2023 Asia Insights Report

Private equity fundraising more than doubled in India last year. As it becomes the world’s most populous country, global private equity sees growth in supply chain manufacturing and tech.

While the total value of private equity investment into India has fallen from the peak of 2020 and 2021, the number of deals being made there continues to grow and fundraising is booming as global private equity funds pivot from China to the world’s second largest population.

Private equity funds located in India raised more than double the amount in 2021 – a 163% increase in fact – lifting the total raised to USD13.7bn from USD5.2bn in 2021, according to data from Refinitiv. Sentiment is high. In a survey by Private Equity Wire in January, India was ranked as the second most attractive area in Asia for private equity investment, behind south-east Asia.

Technology – a large and growing section of India’s economy – was ranked as the sector most attractive for private equity investment across Asia as a whole. Internet and computer software companies saw the highest level of investment in India last year and were jointly responsible for around 66% or US$15.3bn of the private equity investment there during the year. “As investors diversify away from China amid increased uncertainty in the market, India and Southeast Asia may benefit from this shift,” Elaine Tan, a senior analyst at Refinitiv, wrote in an analyst note. “Value creation through digital transformation and increasing depth in India’s innovative start-up ecosystem continues to drive activity.”

Across India, at least three start-ups were created every day of last year and the country was home to the second highest number of unicorns in the world – defined as a start-up valued over US$1bn. With international fund managers nervous of consumer tech in China following government regulatory crackdowns in 2021, India has appeared a safer bet (even with new rules from the Reserve Bank of India on digital lending last year).

“I would say the regulatory environment is stable, supportive and predictable,” says Amit Jain, Head of Carlyle’s India investment advisory team who was hired in 2021 as part of Carlyle’s doubling down on the region. “Based on our experience, we believe that the rules of the game are clear. For investors like us, depending on the sector, it’s very clear what you can own and what you cannot own. In our view, India has had an open and constructive stance towards technology and technology-enabled global businesses.”

Demographics and economic growth are a big part of India’s story. At some point this year, India is expected to overtake China as the world’s most populous nation, as China’s population shrinks. Scaling Indian lifestyle brands or mapping e-commerce markets in the country is made easier by global GPs bringing in experience from their activities in developed markets, but this also makes India a more suitable part of global buyout fund strategy, rather than a country-specific fund, says a person at a US-based fund.

In an interview with India’s Economic Times in February, KKR co-founder Henry Kravis – described by the newspaper as an “Indophile who has been frequenting [India] since 1998” – said India is in “beta (stage) right now” and talked up technology and infrastructure as two key areas of investment. “India has a lot of young companies and a lot of young entrepreneurs and that is your future,” he told the interviewer.

Beta stage

“India is one of the most sought-after points in Asia,” agrees Rainer Ender, head of private equity at Schroders Capital, pointing to the country’s young population, good education, English language and its role as a new manufacturing hub in the region. But he warns: “you cannot be too procyclical there, even though the private equity market is still surprisingly small”.

While it is unlikely India will replace China as the world’s factory floor, the Modi government is trying to lure manufacturing from China by spending on infrastructure. He unveiled a $1.3tn infrastructure plan in 2021 and continues to pump money into roads, airports and power projects ahead of an expected re-election this year. Many of the most well-known private equity firms active in India such as KKR and Canadian pension giants CPPIB and OTPP are already investing heavily in India through their infrastructure funds.

Speaking at a press briefing in February, Blackstone’s president and chief operating officer Jonathan Gray, said a “government oriented towards growth” made Blackstone bullish on India and an “anchor” which will continue to be its biggest market in Asia. Blackstone manages assets worth $50 billion in India, including in private equity and real estate and plans to invest more in data centres and warehousing, driven by a rise in ecommerce transactions, he said.

The reorientation of global supply chains in Asia is also attracting private equity into India’s pharmaceutical, chemical, and power sectors. Advent International and PAG were both involved in the separate acquisition of Indian pharma companies last year. The fragmented, often family-owned structure of Indian pharma make it ripe for continued private equity interest.

Exits maturing

One challenge for private equity and venture capital funds in India has been the exit environment, which is considered still immature by international standards. After a “subdued” period, almost three quarters of all India’s PE and VC exits by value took place in the five years after 2015, according to a recent report by EY. The same report identified “issues of corporate governance, contract enforcement and lack of a vibrant ecosystem for secondary and strategic deals” as exit hurdles during the period mentioned. Big-ticket acquisitions of start-ups such as Walmart’s $16bn purchase of Flipkart in 2018 are still rare in India and large IPOs can be challenging. Increasing levels of domestic liquidity are helping, says Jain at Carlyle. Increased activity from global buyout funds, a trend for more controlling stakes and larger investment sizes should help further.

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