India emerges as big PE hub with 86% investors planning higher allocations

Despite global economic challenges, investors remain optimistic about India's growth prospects, with 86% anticipating increased allocation to the country, according to a survey conducted by Grant Thornton.

  Deal activity in India has rebounded, with 643 deals worth $17.1 billion recorded in the first half of 2024. Investors are eyeing sectors like consumer, retail, healthcare, and technology for high-value deals.

"With funds rethinking their exposure to China, India is in a pole position to benefit from the global pie of funds because of the sheer size of its economy. A strong economy, low trade deficit, low current account deficit, substantial foreign exchange reserves, and expectations of sustained GDP growth all work in India’s favour. The fact that the country is a private consumption-driven economy protects it from external forces that can disrupt growth. In response to the growth story, global investors are either setting up India-dedicated funds or increasing their allocation towards India," said the Grant Thornton report. 

India accounted for 20% of all private equity (PE)- Venture Capital ( VC)  investments in 2023 in the Asia Pacific region, up from 15% in 2018. Both domestic and global funds are  diversifying across various sectors and asset classes within India, noted the report.

India has leaped from the 11th to 5th place in the global GDP rankings within a decade and is also the world’s fifth-largest stock market behind the United States, China, Japan, and Hong Kong, making it a prime destination for foreign investors.

Here are the key highlights of the report:

In 2023, the pace of dealmaking in India slowed down both in terms of volume and values, mirroring the broader global trend. Dealmaking rebounded in 2024. According to Grant Thornton Bharat’s Q2 2024 dealtracker, there were a total of 643 deals worth $17.1 billion involving private equity firms in the first half of 2024. The second quarter of the current fiscal ended on a high note with an 8% increase in deal value and a 9% increase in volume, witnessing 22 high-value deals (estimated at $100 million or more) in Q2 alone, and a total of 33 high-value deals in the first six months of 2024.

"This bullish trend is expected to continue as per our survey. About 48% of investors foresee an exceptional level of deal activity in India over the next three years, while 50% expect moderate deal activity. Private equity firms are actively seeking opportunities that align with their long-term objectives. However, opinions on current valuations are mixed. Some investors find them more reasonable than past highs, while others view them as still high or overvalued," noted the report.

Investors remain optimistic, with 48% predicting an exceptional level of deal activity over the next three years, driven by high-value deals in key sectors such as consumer, retail, healthcare, and technology.

 ESG considerations are becoming integral to private equity investment strategies, with 55% of respondents stating that ESG frameworks guide their investment evaluations. While not all are on board, with 34% expressing uncertainty, the shift towards sustainability is expected to drive long-term value creation.

 Valuation mismatches continue to be a major obstacle, with 57% of respondents highlighting concerns about high valuations in the market.

 Despite high valuations, private equity exit activity is expected to improve over the next three years, particularly through IPOs and strategic acquisitions. The average holding period for a portfolio ranges from three to five years, with investors keen to take advantage of profitable exit routes in India's booming equity market.

 Private equity firms are increasingly adopting hands-on strategies to create value within their portfolio companies. Beyond just injecting capital, they are leveraging their operational expertise to streamline processes, implement growth strategies, and drive long-term value.

The role of technology, particularly artificial intelligence (AI), is expected to be transformative for the private equity sector. AI is already being utilised to enhance due diligence, portfolio management, and investment decision-making, providing firms with a competitive edge in an increasingly tech- driven landscape.

 In the next three years, the consumer and retail sectors are expected to lead private equity deal volumes, followed by healthcare, financial services, and IT/technology. 

Key Challenges:

1. High Valuations: A persistent challenge for private equity investors, 74% of respondents cite high valuations as a significant issue, making it difficult to find attractive deals. Promoters often demand valuation levels

comparable to those of listed companies, adding complexity to negotiations and deal closures.

2. Geopolitical Tensions: Global geopolitical tensions, including the war in the Middle East and civil unrest, are causing concerns for 60% of investors. These issues may dampen global dealmaking, further complicated by

trade tensions and economic downturns in key markets.

3. Market Volatility: Economic slowdowns, exchange rate fluctuations, and market volatility present risks to private equity investments. 52% of respondents identified these factors as major challenges, impacting not just

deal activity but also fundraising efforts and exit strategies.

4. Exit Difficulties: The challenge of exiting investments, particularly in a high-valuation environment, remains a concern. With many deals from 2021 delayed due to inflated valuations, investors are now cautious about future exit opportunities, focusing on profitability and more sensible valuations.

5. Regulatory and ESG Concerns: Regulatory changes and increasing scrutiny around ESG standards pose additional challenges for private equity firms. While ESG is becoming central to investment decisions, not all investors are aligned on its importance, with 34% expressing uncertainty about its future role.

"The trend in high-value deals indicates that investors are strengthening their positions in businesses with proven models driven by consumer demand. There is continued interest from sovereign wealth funds in long-term real assets and fundamentally strong businesses," said Vishesh C Chandiok, CEO, Grant Thornton Bharat.