BS BFSI Summit 2023: Professionally run mfg cos to drive PE growth in India

PE investment to flow to financial, healthcare, and consumer sectors

Indian private equity (PE) sector is set for massive growth in the coming decade with homegrown, professionally run manufacturing companies driving the growth of the PE/VC industry, heads of top private equity firms said at the Business Standard BFSI Summit on Tuesday.

“There’s an absence of negative trends in the PE and venture capital (VC) investments, exhibiting a consistently upward trajectory,” Renuka Ramnath, founder, managing director (MD) & chief executive officer (CEO) of Multiples Alternate Asset, said. India’s share in APAC PE/VC investments has gone up to 23 per cent in 2023 from 14 per cent till 2020, showing as an investment destination.

 

“I would like to put it very decisively that there is no negative trend at all and it is only a positive trend (for investments). It is a secularly upward, and very strong increase in capital flow from the PE sector,” she said.

Over the next 20 years, two key trends will prevail in the Indian corporate sector as professionally run firms and evolving Indian manufacturing will take the centre stage, said Amit Chandra, Partner, Private Equity, Bain Capital. “Currently, not all our engines are firing effectively; specifically, it’s the export-oriented ones that are underperforming,” said Chandra.

“The PEs are long-term capital providers capital and, therefore, when we provide long-term capital, we have to look at long-term trends. When the PEs started about 15 years ago in India, it accounted for under one-fourth of foreign direct investment to India. Now, in the past three years, despite the volatility, private equity and venture capital account for over two-thirds of foreign direct investment in India. So it has become the most important source of long-term capital for the country,” Chandra said.

“In the past 2-3 years, investment in India has been 2x of what it was 4-5 years back,” said Vishal Tulsyan, MD and CEO, Mot­ilal Oswal Alternate Investment Advisors. Tulsyan said lots of Indian firms were investing in the manufacturing sector, which would help India grow at 10 per cent. 

“Over the next 20-25 years, India will grow to $35 billion economy and that cannot be achieved with massive integration of capital. The number of PE/VC investments over the next 7 to 10 years will be 5x of what we are seeing right now. A huge amount of capital has to be deployed, and raised offshore. Significantly, more capital has to be raised on the domestic side,” said Tulsyan, citing the example of investment in Dixon Techn­ologies more than a decade ago, when no one was investing in the electronic sector.

Ankur Bansal, co-founder of debt-focused private equity, BlackSoil,  however, said there was hardly any capital available now for startups, and what was in abundance till recently had become scarce. 

“Due to this, alternate forms of capital like debt have become more in demand. The industry was very small earlier at around 200-$200 million back, and now it’s crossing a billion dollars. And the way the industry participants are adding into this new asset class, we are seeing a lot more action happening as well,” Bansal said.

He said a complete reset had happened for the entire startup ecosystem,thanks to the stocks that are listed from the new economy space. “Everybody realised that the way the models were being built were not sustainable, and it’s important to relook at the business models, which is sort of what has been happening for the last 18 months and it's still a work in progress,” Bansal said.

Some 30 startups reported Rs 20,000 crore loss in FY23 and $140 billion of investments has already gone into the startup ecosystem in the last 7-8 years, and everyone is working on correcting the business models.

Ramnath further said that certain sectors are evergreen for the PE industry. "The financial sector, pharmaceuticals and healthcare, and domestic consumption are promising areas of investments by the PEs," Ramnath said.

"There is a pause in the consumer technology sector, but the traditional consumer sector has been a promising area of investment," Ramnath said.

"Right now, we are seeing a humongous interest in healthcare, but in the last 10 years, nobody was interested in any healthcare assets. Pharmaceuticals is a little more permanent story. But again because of the dependency in the US market for certain companies as they have made the US generics as their key strategy, we see some volatility," Ramnath said.

Ramnath said the most exciting thing happening in India is a change of ownership from families to institutions. "The biggest change we are going to see in the next 10 to 15 years as financial investors are going to be controlling shareholders in large part of corporate India as it is for new companies.

"We are seeing that the only source of capital is PV/VC for an entrepreneur who is not bringing his own capital, but he has a very powerful idea that is brought forth only with PE/VC investment," she said.

"We are also seeing that in multi-generational transfer of businesses, the new generation is not interested in carrying on the legacy of their previous generations, and selling to a financial sponsor is the most logical thing. This is the change that happened in America probably 30 years back," she said.

Chandra said India is now living in a very interlinked world and given the scale of the economy, India has to plan for these economic and political events. "To truly build an atmanirbhar capital market we need to build a domestic asset management industry," Chandra said.