As the economy normalises, the VC/PE industry is expected to look at India with higher firepower. Global trends are pointing towards a renewed interest in consumer staples, BFSI, and ITES, all recording growth in total deal value
COVID-19 has changed the way businesses are analysed, and expectations are built about their performance. Perhaps, this was never so true for the venture capital and private equity (VC/PE) industry that has emerged as an important source of financing in a capital-deficient nation such as India.
As the economy went into a tailspin due to the pandemic, investors and analysts were trying to decipher ways to protect existing investments. At the same time, a persistently low interest rate environment spawned a situation where more money was being suddenly made available to investors. This available quantum of capital, which in private equity parlance is called dry powder, kept the deals momentum healthy during the crisis years of 2020-21.
Nevertheless, investor preferences and investor appetite changed. This transition is visible in the VC/PE ecosystem, and, therefore, global cues had significant impact on India. Analysing data available from Pitchbook along with the 2021 India Private Equity Report (Bain & Company and IVCA), we try to decode the evolution of the VC/PE investors in India, both before and after the onset of the pandemic.
Healthcare, Manufacturing, And ITES
The emergence of healthcare as one of the most preferred sectors does not seem to be out of place, given the mayhem caused by the pandemic. As per Bain/IVCA data, the average deal size for healthcare investment in India increased to $239 million in 2020, as compared to $194 million in 2019. When compared with global data (from Pitchbook), the average deal value pertaining to healthcare was recorded at $528 million in 2020, growing 93 percent from 2019.
The heavyweights, such as ITES and manufacturing, maintained their growth and continued to garner investor interest. The average private equity deal value in the two sectors increased by 24 percent and 56 percent, respectively in 2020. While these statistics are in line with global trends as far as manufacturing is concerned, there appears to be a disconnect with ITES.
Global data states that ITES lost some of its sheen for investors as the total deal value declined to $60 billion in 2020, down 24 percent when compared to 2019. This was probably because of lower global interest in consumer discretionary and other consumer-focused categories. As uncertainty forced consumers to look toward savings, discretionary spending took a back seat.
Nevertheless, India-specific ITES investments pertaining to EduTech platforms rose, and the sector experienced heightened activity given the number of startups available for investment.
Impact On BFSI
The banking, financial services and insurance (BFSI) sectors were another COVID-19 casualty as rising systemic liquidity and a subdued credit offtake have taken their toll. Given their inability to effectively match assets and liability, financial institutions such as banks and NBFCs have seen significant stress on their balance sheets. Additionally, for much of 2020, existing assets were at risk of default or delayed repayments, further stressing finances. This underperformance has been reflected in private equity investment preference as the BFSI sector as a whole saw declines in both deal value and deal size.
Globally, similar trends were evident as the sector experienced contractions not only in terms of deal value (-17 percent), but also in terms of deal contribution. Evergreen sectors such as real estate, however, maintained their momentum, along with investor interests, who in turn took advantage of subdued prices.
Higher Fire Power
In the venture capital space, not many divergences were seen as compared to those in private equity. As per 2021 data available from VCC Edge, deal value in India had been over $25 billion, which was a record of sorts. The domination of VCs continues to be in the technology (software), transportation, and retail space. However, diversified finance sector needs a special mention. Overall, fintechs are offering an avenue to VC investors to park their cash at high valuations, and take advantage of Indian talent. COVID-19-related consumer lifestyle changes will continue to evolve the industry.
As the economy normalises, the VC/PE industry is expected to look at India with higher fire power. In the months that follow, a high interest environment will make conventional capital expensive, and businesses will find value in alternative funding, despite comparably higher capital costs and potential loss of management control. Even though data for Indian private equity deals is not widely available for 2021, global trends are pointing towards a renewed interest in consumer staples, BFSI, and ITES, all recording growth in total deal value.
With India’s ambition to become a manufacturing hub, thanks to Make in India combined with the PLI scheme, we are optimistic that the VC/PE industry will play a much bigger role in the months to come, as far as automotive, space tech, and semiconductors sectors are concerned.
https://www.moneycontrol.com/news/opinion/how-indias-pevc-industry-evolved-during-covid-19-8165221.html/amp
