The private equity landscape in India in the first half of 2023

by MMC
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After three years of exceptional growth, 2023 marks a slowdown in the exuberant private equity and venture capital (PE-VC) activity seen since 2020, against a backdrop of pessimism in global markets. India recorded $21 billion in PE-VC investments six months into 2023, a significant decline from the $40 billion in deals completed during the same period last year. Over the past three years, the Indian PE-VC ecosystem has gone from strength to strength, witnessing an exceptional uptrend, with over $60 billion in transaction value unlocked every consecutive year since 2020. In 2021, the India has touched around $70 billion in PE-VC. investments amid an abundance of dry powder, low interest rates and a bustling venture capital ecosystem. Amid slowing activity in 2022, India saw around $62 billion in investments as geopolitical uncertainties, tighter monetary policy and supply chain disruptions converged. At $21 billion, the first half (H1) of 2023 is comparable to that of H1 of 2019, signaling a strong “reset” of the PE-VC landscape, with a return to the baseline level before the exceptional rise.

The compression in transaction value is mainly due to transaction volumes, which have continued to decline since the second half (H2) 2022, down 15%, from around 800 in H2 2022 to around 680 in H1 2023 ( and 40% between H1 (around 1,250 deals in 2022 and deals in H2 2022), indicating a slowdown in investor activity. On the other hand, large deals have made a comeback as Investors have moved away from a long tail of small and mid-sized checks and toward larger deals. The first half of 2023 alone saw four megadeals over $1 billion, compared to three such megadeals in the overall from the previous year. In the first half of 2023, the share of large transactions increased and the average transaction size increased by approximately 20%, reaching approximately $37 million.

It is important to note that although India saw a general slowdown in the first half of the year, a quarterly analysis revealed shoots of optimism. As quarterly deal value fell from a high of $23 billion in the second quarter (Q2) of 2022 to $8 billion in the first quarter (Q1) of 2023, the second quarter of 2023 was the first quarter to reverse the downward trend with an upward trajectory and reach $13. billion dollars, a growth of 60% compared to the first quarter of 2023, propelled by large transactions concentrated in the second quarter (see Figure 1).

Quarterly view reveals reversal of downward trend since mid-2022

Additionally, private equity activity in India remains robust. Private equity increased by around 10% compared to the second half of 2022, reaching $16.5 billion, which, at around 80% of total investments, gradually recovers the share lost to venture capital and of growth capital in 2021. Venture capital and growth capital continued to lose momentum, growing around 25%. contraction in transaction value in the first half of 2023, compared to the second half of 2022, to close at around $5 billion. Venture capital deal volumes continue to decline as the venture ecosystem evaluates the scope of its investment portfolio and recalibrates its approach. Venture capital and growth equity investors invested money, over several rounds, in two assets that contributed approximately 30% to the value of venture capital and growth deals, PhonePe and Lenskart, revealing plans to deploy capital into marquee assets, with investors still full of fresh, dry powder. .

Another sign of a reset is the share of sectors such as banking, financial services and insurance (BFSI); health care; energy; and consumption and retail returned to pre-Covid levels of around 75%, reversing the share overtaken by information technology (IT), software as a service (SaaS) and big tech. public during the frenzy of 2021-2022, which contributed more than 70% of the total transaction value during this period. IT/IT services (ITeS) lost about 6 percentage points from its share in 2022, due to the blockage of megadeal activity. For example, the largest ITeS deal was Xoriant for around $250 million (compared to several deals over $250 million in 2022). , including CitiusTech, IGT, Fractal). Consumer technology lost about 13 percentage points per share from 2022, as consumer technology activity from the previous two years continued to soften. Three sectors contributed more than 50% of all capital deployed: energy, with a value share of around 21% in the first half of 2023; BFSI, with a share of around 17%; and health care, with a share of around 15%. Additionally, these three sectors grew in share and value in 2022 and dominated major deals – with billion-dollar deals in Manipal Hospitals and HDFC Credila, followed by large deals in Greenko Energy, DMI Finance, Aditya Birla Capital and CleanMax Energy, to name a few. little. Concretely, the first half of 2023 brought BFSI to the forefront. Investments in non-bank financial institutions have gained momentum, driven by growing demand for borrowing, with a focus on education finance, through deals such as BPEA EQT’s HDFC Credila and ChrysCapital, and Avanse Financial Services from Kedaara Capital.

Buyouts and acquisitions of majority stakes accelerated significantly in 2023, with activity concentrated in traditional sectors. Notable majority stake transactions are Temasek’s investment in Manipal Hospitals (healthcare), BPEA EQT and ChrysCapital’s deal in HDFC Credila (BFSI), ADIA and GIC’s follow-on investment in Greenko Energy ( energy) and the acquisition by Carlyle of VLCC Wellness (consumer and retail). With $6.4 billion in buyout activity at 39% of PE deal value in six months, 2023 is expected to surpass 2022 buyout activity and is already a record year for non-IT buyouts, relative to recent years.

Exit activity slowed slightly in the first half of 2023, but managed to remain relatively buoyant to reach around $10 billion during this half of the year, surpassing the pre-2021 annual baseline by around 9 billion dollars. Public market sales and secondary sales have ramped up to dominate about 90% of exit value, driven by buoyant public markets and pressure from cash-strapped limited partnerships. Notable exits are Manipal Hospitals by some funds (TPG, NIIF), Kotak Mahindra-CPPIB, Sona Comstar-Blackstone and IBS Software-Blackstone. Non-tech sectors also dominated exits, reaching a share of around 85%, with healthcare, logistics and telecommunications gaining market share due to the contraction in the IT sector.

One of the highlights of this year has been the emergence of environmental, social and governance (ESG) as a major investment theme, more important than any other sector-specific theme. ESG-aligned assets have attracted $4.5 billion in investments, with 1 in 5 PE-VC investment dollars going to ESG. Growth is primarily driven by strong tailwinds from the energy transition, with over 80% share of clean energy driven by leading investments in Greenko, ReNew Power, CleanMax and Adani Green Energy, among others. For several years, ESG in India has been dominated by around 15 investors in the private equity sector, including CPPIB, GIC, ADIA, KKR, Brookfield and dedicated ESG/impact investors like Actis and TPG Rise , which channeled about 50% from near $24. billion in ESG investments since 2018. While major investors remain focused on clean energy and electric mobility in India, smaller segments such as sustainable food, healthcare and circularity continue to emerge with smaller assets.

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