2010s: 'PE's journey has been one of growth'

As we enter the last year of the decade, hopefully one that we can later look back and allude to as the “roaring 20s” of India, I can’t help but pause and picture an image of Indian private equity (PE) entering the 20s of its own life. Just as the early-mid-teens can be a turbulent time for teenagers, the early part of this decade was a challenging period for the industry. But, much like life, as we enter the 20s, I believe the Indian PE industry is hitting its stride and embarking on a period of increased potential. 

The journey over the last decade has been remarkable, and one of growth. 2019 should be a record year for investment activity, with private equity and venture capital investments into India exceeding $38 billion, versus investments for most of the 2010 to 2015 period averaging about $14 billion each year.

Investor interest in the Indian market has recently become broad-based. This is true both in terms of the types of investors now investing in India, and the sectors that are receiving this investment. Today, the Indian private equity market has matured considerably with domestic, global, and sovereign funds all actively participating in the region. Further, the industry has matured to the extent that funds are now focusing on their core mandate (for example, growth equity, leveraged buyout, restructuring) versus having to create a strategy for India that did not align with their global expertise. In addition, PE funds are looking beyond more traditional sectors such as IT services, infrastructure & real estate and financial services, and are now investing behind other sectors that are driving India’s growth, including technology, business services, health care & life sciences, and consumer. Private equity is now an established—and sought after—capital base for India’s fast-growing companies. This did not happen overnight, and the journey to this new normal has been built on some important shifts.

A big catalyst for the growth of private equity has been the rising acceptance and interest for family businesses to work with PE funds—a particularly key change given that large swathes of the Indian corporate landscape are still dominated by family-owned businesses. Previously, families looked at PE funds with suspicion and were hesitant to bring external capital into their companies, and PE funds were hesitant that family businesses would not embrace the professionalisation and governance changes required to optimise their businesses.

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Now, after decades of PE funds investing in India, the value-add that these funds have brought to their portfolio companies is evident: Establishing global governance standards and making companies IPO-ready, navigating succession issues, professionalising and attracting high-quality talent and driving strategic M&A to name a few activities. I believe family business owners recognise PE funds as a truly differentiated capital base that can help them achieve their ambitions. Further, families have seen funds operate through various economic cycles and can appreciate the benefit of long-term, patient capital that can support businesses through periods of distress.

Another enabler of investment activity has been the growth of professional talent willing to work with PE funds. Entrepreneurs and senior talent in India increasingly appreciate the governance that PE funds bring to companies, and the ability of PE funds to empower them to achieve results. They have also seen value-creation opportunities play out in PE-backed companies, and as a result, are seeking to work with these companies. This development has allowed PE firms to back high-quality “professional entrepreneurs” to drive their returns strategy and has also facilitated the increasing frequency of control transactions in the market.

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It is also important to acknowledge that we are currently operating in a period of profound and rapid technological disruption that has fostered a surge in entrepreneurial activity. Today, in a digital India, we have more connected citizens, who were previously only accessible to the largest of Indian companies with deep-reaching distribution channels, but now can be reached by small startups across sectors. This shift has ushered in a new generation of first-time entrepreneurs who have built exciting companies addressing unmet needs in financial services, education, health care, and the consumer sectors. We are seeing that these new entrepreneurs appreciate the global-but-local domain expertise, network, and support that PE funds can often bring. The rise of these entrepreneurs has been a critical accelerator for the PE market in India.

Finally, global investors now have more conviction that they can make successful investments in the Indian market. Many funds have often looked at India and commented that it’s a great market on paper, but there have been few successful exit events. This has dramatically changed over the last decade, with 2018 as an exciting year for PE exits, aggregating to over $30 billion of liquidity. Even excluding Flipkart, the liquidity achieved for PE exits in 2018 would still be significantly higher than the exit achievement for most of the rest of the decade, which was on average $7 billion each year between 2010 and 2016. Funds are no longer waiting on the sidelines; rather, they are pushing aggressively into India. We are seeing this development manifest in larger transactions —there were over 130 transactions over the last two years that had greater than $100 million fund raises—and a more competitive PE market.

I celebrated entering my 20s, which was—unfortunately—a long time ago. It marked the beginning of a period of promise, opportunity, and adventure. I’m equally excited for the Indian PE industry entering the 2020s. We are beginning a period of rapid change in India, and this brings increased opportunity. At General Atlantic, we are looking forward to the next decade of this journey.

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