India sees PE, VC deals worth $45 bn in 2019, highest inflow in 10 years: Report

India continued to be the second largest deal market in the Asia-Pacific region in 2019 with over 1,000 private equity and venture capital pacts valued at USD 45 billion - the highest in the last decade, a report by Bain & Company said on Wednesday.

Private equity (PE) and venture capital (VC) investment in the country rose to its 10-year peak primarily due to the increasing number of large deals greater than USD 100 million as well as an increase in their average deal size, the firm’s India Private Equity Report 2020 said.

The report, developed in partnership with the Indian Private Equity & Venture Capital Association (IVCA), also found that exit value in 2019 decreased, finishing at nearly USD 13 billion against USD 17 billion in 2018 (excluding Flipkart's exit).

This was still the third-highest for the last decade. The dip over last year was led by a decrease in the number of exits from 265 to 200.

India-focused dry powder (marketable securities that are highly liquid and considered cash-like) will remain healthy, but a potential reduction in investments could occur in the first half of 2020, accompanied by a price correction across the board, the report noted.

India continued to be the second largest private equity deal market in Asia-Pacific (APAC) with the most growth in the region, it said adding that India’s share of the APAC deal market increased to nearly 25 per cent in 2019, and the investment value was about 70 per cent higher than in 2018 and nearly 110 per cent higher than the previous five-year average.

Meanwhile, China’s PE market witnessed a decline in both deal value and volume due to trade war concerns, social unrest and stringent Renminbi fundraising regulations, the report said.

Of the top 15 deals in India - which constituted more than 35 per cent of the total investment value in 2019 - five were in real estate; three in IT and ITES; and the rest across banking, financial services and insurance (BFSI), telecommunications, energy and consumer technology.

Notable large investments in 2019 included stakes in Reliance Jio Infratel, Pipeline Infrastructure, Axis Bank, GMR Airports, GVK Airport Holdings and Paytm. Real estate and infrastructure, telecom, IT and ITES, and BFSI contributed to more than 90 per cent of the growth in investment value.

BFSI investments were fuelled by deals in banks as well as non-banking financial companies with investments of USD 8.4 billion, while consumer technology attracted USD 7.7 billion of investments in 2019. Almost half of these investments were in vertical e-tailers/marketplaces and fintech companies.

"From an investment perspective, we will likely see a short-term dip in investment activity with COVID-19, as already evidenced globally. However, this imminent price correction across the board will present an investment opportunity.

“Investors need to triage their portfolio and take actions to adapt to the changes in the economy which includes taking immediate actions to ensure business continuity and plan for value creation to retool their businesses for the future," Arpan Sheth, Partner at Bain & Company and one of the lead authors of the report, said.

He added that the market disruption caused by COVID-19 could lead to growth in select pockets such as e-commerce, enterprise technology, healthcare, and on-demand services.

Like previous years, the total share of buyouts rose with an increase in growth and late-stage investments. These featured a few large individual buyouts like Reliance Jio Infratel (USD 3.5 billion) and Pipeline Infrastructure (USD 1.8 billion), the report said.

With recent investments from global players, competitive intensity in the Indian investment market has progressively increased, with 662 active funds in 2017-19 compared with 553 funds in 2015-17, it added.

The report pointed out that the COVID-19 pandemic signals the possibility of a significant impact due to increased global interconnectedness and the virus' high spread rate.

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India is beginning to face the impact of COVID-19, with major import and export destinations impacted as well as the stock market which has taken a hit in recent months, it said.

The report said, based on global financial crisis experience, deals invested during or after a downturn tend to do well.

Overall APAC-focused fundraising slowed considerably, dropping to about USD 80 billion in 2019 from nearly USD 200 billion in 2017. This was largely driven by weakening Renminbi-based funds, reflecting the Chinese government's tightened restrictions on PE investments.

A majority of investors expect the fundraising environment to be more challenging in the next 12 months, driven by record-setting previous years, cautiousness of a slow economy and limited partnerships being highly selective with increasing competition, the report said.

"A strong exit track record will be important for future investments. Having seen record investments last year, Software as a Service and cross-sector technologies will be the attractive opportunities for investors in the future," Sriwatsan Krishnan, Partner at Bain & Company and a co-author of the report, said.

With an unpredictable public market, strategic sales became the preferred mode of exit, accounting for about 50 per cent of exit volume.