Private equity investors see big global, sovereign funds as main threat

India’s private equity (PE) and venture capital (VC) players say that their biggest competitive threat in the next 12 months will come from large global PEs and institutional funds, such as sovereign funds in West Asia, that invest directly and dominate the Indian PE landscape.

A Bain India Private Equity Survey of investors points out that as much as 72 per cent of them see the big global PE firms as a competitive threat, while 40 per cent point to LPPs or institutional investors and sovereign funds as a threat.

The large global PEs include KKR, Blackstone, TPG, Baring, amongst others. The big institutional investors are dominated by sovereign funds like Temasek, GIC, Public Investment Fund, amongst others. Domestic PE players include funds like Multiples, Kedara, and so on, who, along with the global PEs, form the majority of the country’s PE players.

   

The domination of the big PE players is also reflected in the India Private Equity Report 2021 published by Bain & Company in association with Indian Private Equity and Venture Capital Association. The report, which is to be released today, points out that in 2020 the top 10 biggest investors were all global or institutional PEs, which together put in $20.5 billion, accounting for a third of all deals in 2020. The average deal size of the 10 top players is $465 million, reflecting their stranglehold over the PE market. 

There is not a single domestic PE fund which is in the coveted top 10 list.  The two top investors, PIF and KKR, invested $ 6.6 billion in 2020, with an average deal size of $800 million each.  

 

 

What’s more, the top 15 deals accounted for 40 per cent of the total value of deals in 2020, while in 2019 the figure was 35 per cent. In the same period, the total number of PE and VC players went up by 13 per cent — from 687 in 2019 to 777 in 2020.      

The growing importance of India for the big PE players is also reflected in the fact that while fund raising has been falling in the Asia Pacific region (33 per cent drop over 2019-20), with investments in China shrinking even more, India’s share in the Asia Pacific funds has remained at a steady 3 per cent.

The report says that investor confidence has remained high, with India- focused dry powder remaining resilient at $8 billion and over 90 per cent of the closed funds on target or over-subscribed. But the number of closed India-focused funds dipped from 86 in 2019 to 46 in 2020.  

From a sectoral perspective, healthcare has caught the fancy of a number of private equity investors. According to the Bain India Private Equity Survey, in the calendar year of 2021, healthcare ranks third amongst the key sectors of focus for PE investors, behind only consumer tech and IT\ITES sector. Even amongst the various sub-sectors in consumer tech, 65 per cent of the respondents chose digital health as the No 1 area of investment focus.

Needless to say, the spike in investor interest in healthcare has been due to the fact that the Covid-19 pandemic has forced millions of Indians to go online not only to buy medicines, or book a test, but also to consult with doctors.   

Even in 2020, healthcare was ranked at No 6 in PE investments. But sensing the opportunity provided by the pandemic, and especially after its second wave, the sector has become extremely attractive for many investors. The report says that PE investments in the healthcare sector went up by a staggering 1.6 times for deals above $5 million. Led by API, CDMO and the formulations sector, PE funding in healthcare has shot up from $1.5 billion in 2019 to $2.4 billion in the pandemic year of 2020.

At the same time, the banking financial services and insurance (BFSI) sector saw investments plummet by 60 per cent due to the slowdown driven by high non-performing assents and uncertainty on the impact of the moratorium on bank balance sheets. The other areas which saw a decline include consumer retail, renewable energy and infrastructure, energy and telecom. Instead of these sectors, PE investors focused their attention on resilient or growth sectors like healthcare, consumer and technology sector. 

The pandemic, the report says, also led to a clear shift in the nature of the deals done. Hence, buyouts, which accounted for over 30 per cent of all deals in 2019, fell to a mere 10 per cent in 2020. The reason: Reduced cheque sizes and the slowdown in the BFSI and real estate sector. The pandemic forced distressed companies to raise additional funds to meet working capital requirements, especially in the hospitality and real estate sectors. Moreover, there was a spike in QlPs by companies to shore up their capital reserves and meet immediate liquidity requirements. And VC funding saw a 7 per cent increase in deal volumes because of the focus on early-stage growth deals.