Insights
How will PE/VC investments fare?
June 18, 2019There is a weight of expectations from the new government’s Union Budget to be presented in July, with the hope that a bold set of reforms will help kick-start private consumption, rejuvenate the rural economy and accelerate public expenditure in areas like infrastructure development.
Even with all the euphoria around India’s election results, the country’s key economic indicators remain depressed. If the economists are right, one of Asia’s largest economies seems to be losing its glitter and sheen. Sales data across consumer goods, automobiles and tractors have slumped. The Index of Industrial Production is virtually stagnant and unemployment is upwards of 7%. Based on overall economic data, India’s economy grew at a six-quarter low of 6.6% in the October-December period. GDP growth for FY19 is pegged between 7.3% and 7.5%, depending on whose estimates you rely on.
Despite the lacklustre economic data, India remains a bright spot in an otherwise uncertain global economic narrative. Now armed with the BJP’s overwhelming victory and decisive mandate, India has a real opportunity to shine brighter. There is a weight of expectations from the new government’s Union Budget to be presented in July, with the hope that a bold set of reforms will help kick-start private consumption, rejuvenate the rural economy and accelerate public expenditure in areas like infrastructure development.
Even as we anticipate what the inaugural Budget will hold, the market for PE investments in India remains positive. In fact, 2018 was watershed year for PE/VC investments, with investments peaking at $35.8 billion and exits at $26 billion. Fundraising by PEs/VCs rose by nearly 40% year-on-year, adding to the vast reserves of dry powder already available in the market. Private equity in India is indeed at a historic inflexion point.
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Early data from 2019 suggests that the country’s M&A landscape is off to a strong start, thanks to a number of enabling factors. The first on the domestic front is renewed political certainty after the BJP’s overwhelming win. Foreign investors, in particular, have long remained wary of fragile coalition governments, so a majority win should be a source of comfort. The second factor on the international front is escalating trade tensions between the US and China. The trade war could lead to significant dislocation in the international markets, with countries like India standing to gain, provided we can transform the economy into a production hub.
The third factor lies in the increasing divestiture of non-core assets as Indian companies seek to reposition themselves to focus on their core business. A recent EY survey showed that 81% of companies planned to divest assets within the next two years, providing plenty of opportunity for both PE investors and strategics. Finally, India’s PE deals have come of age and have demonstrated the potential for successful and well-structured exits: this year will likely see larger and more complex deals, given the assurance investors now have that the Indian market can deliver reliable returns.
In my assessment, the banking and financial services, healthcare, technology, renewables and FMCG industries will continue to dominate the narrative in 2019, and will present significant opportunities for deal-making this year and beyond. In all such sectors, there is a huge potential for large, complex transactions, focused towards acquisition of control and buy-outs as Indian promoters themselves become more comfortable with the idea of ceding control. Within the healthcare sector, we see new opportunities in pharmaceuticals, particularly in view of the recent developments between the US and China.
The ‘trade war’ between the two economic superpowers has given a new lease of life to Indian API manufacturers who are now seeking to gain a stronger foothold as China moves from APIs towards innovation. Another significant opportunity for prospective investors within the pharma space is the market for pharmaceutical distribution. India’s pharma distribution market is extremely fragmented and is in urgent need of consolidation. An opportunistic investor could find greater value and opportunity in leading the consolidation process and extracting efficiencies from a newly-created supply chain network.
The renewable energy sector is yet another potent investment theme. India now ranks fourth in the world in wind power-based capacity, and sixth in solar. And yet the addressable market opportunity in renewables is massive—90% of India’s energy still comes from fossil fuels and nearly two-thirds comes from coal. India has pledged that renewable energy will be 40% of its electricity generation capacity by 2030, but vast gaps in the achievement of this target remain. There is at least a $17 billion shortage of equity, and a $36 billion shortage of debt, highlighting an attractive market opportunity.
As with all opportunities, it is best for investors to approach the market with cautious optimism rather than unbridled enthusiasm. While deal volumes look promising, a repeat of 2018 is less likely. An abundance of dry powder and a significant increase in the number of PE players mean valuations will remain high. Investments in IT services will need to be well-thought-through because of the increasing pressure on margins—Indian IT service providers are forced to hire locally due to visa issues.
Additionally, investment activity and deals will remain closely linked to much-needed reforms in the IBC process (for example, introduction of pre-packs and US-style 363 auction sales would substantially increase deal certainty, proper asset valuations and restructuring certainty), and will have to respond to the ongoing liquidity crunch that has followed the retrenchment of PSU banks from the overall economy. If the new government can rise to the challenges of these reforms, it can ensure a healthy pipeline of deals and exits in India. PE investors will then have plenty to write home about.
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Disclaimer
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
