I have long been quite positive on PE and VC investing in India. This view comes from first hand experience. Over the past couple of years I have made several PE and VC investments in India, I travel there several times a year, I meet the GPs regularly, and I see the change on the ground and in the PE / VC ecosystem.
With the general elections just concluded, it is timely to revisit my investment thesis.
Election outcome
Starting with the elections. As was widely expected Nerendra Modi and the BJP secured a second 5-year term. Unexpectedly but importantly with another strong majority.
Though not without some controversies, most notably the demonetization, Mr. Modi’s first term generally saw positive developments. For example: a new bankruptcy code, a nationwide GST, significant infrastructure investments and more.
With a pro-business and growth agenda, I believe Mr Modi's reelection will ensure continued policy stability and predictability which will further benefit both publicly and privately held companies.
The economy
At a macro level the various fundamentals; fiscal deficit, current account deficit, FX reserves, FDI and inflation continue to point in the “right” direction. By all measures India looks set for more stable growth over the next years.
Even if the actual number is subject to some debate, India continues to show strong GDP growth rates, upward of 7%, making it the fastest growing economy in the world. GDP growth will likely not touch double digits but is also not expected to go down to 5%
The INR has, despite a few larger moves, broadly speaking depreciated at a measured pace vs the USD. Today the USD/INR stands at 69.54 vs 67.98 one year ago.
Figure 1: The economy as a driver of private equity
Source: McKinsey & Co 2018
The PE / VC ecosystem
The PE ecosystem has continued to develop well. Not including venture capital (VC) Indian managers in 2017 invested around USD 13bn across 174 deals. This compares favorably with the all-time high of USD 13.2bn across 206 deals in 2007, a point where the ecosystem was far less developed and the economy much smaller.
Exhibit 2: PE investment have reached a stable critical mass
Source: McKinsey & Co, 2018
For buyouts I note a few trends. Firstly, a buoyant fundraising environment has generally led to larger funds. Though not completely without concern I believe the growth in the economy and the increased sophistication of many managers merits this. Secondly, and to some extent in line with the first point, a transition towards larger minority stakes and control investments. This is generally a positive trend, though I also strongly believe that not having control is not an excuse for poor returns and investors should be vary of this.
Also VC has developed positively with a few notable trends. Firstly, underscored by the sale of Flipkart to Walmart, a much improved exit environment. Secondly, with a number of newer funds but experienced managers, more capital available at later growth stages. Finally, more experienced and sophisticated entrepreneurs and investors.
With increasing fund sizes and intensifying competition high valuations remain the main concern for investors in PE and VC in India. However, this is unlikely to change over the medium term and in PE it is only the brave who to time the market. I believe a better strategy is to identify the best managers and with them systematically expand and develop a portfolio in India.
For those looking for a good overview of VC in India take a look at this report published by the Indian Venture Capital Association. For a more general overview of PE in India see this report by McKinsey.
Stay illiquid!
Kasper
Source: McKinsey & Co 2018.
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