India: Private equity fund-raising expected to reach $4.5b on bullish sentiment

Indian prime minister Narendra Modi flew to seventeen foreign countries in his first year in office, and the momentum has continued in the second, the latest being a high-profile visit to the Silicon Valley in the United States.

It is hard to measure the benefits of such trips, because there are several agreements that start showing results in the long term. But one thing is easier to analyze: the impact on funds flowing into Indian startups, both at the seed and early-stage levels. And in that respect, Modi’s pitch to investors has certainly helped Indian companies.

A study by McKinsey shows that India-focused funds have raised $3.9 billion by September 2015, more than double of what they did in the whole of last year. It might not rise to the record level of $7.7 billion seen in 2007, before the financial crisis hit the world, but it is on track to rise higher than 2013’s level of $4.2 billion.

Private equity funds did not exactly plunge when Modi’s predecessor Manmohan Singh was leading the UPA government. But they were relatively subdued as Singh’s administration grappled with a host of scams and foreign investors preferred to wait for a more business friendly environment.

“The efforts of the government to improve the sentiment of foreign investors have played a big role. And there is a belief that when India comes out of this downturn, it will have very attractive fundamentals,” said Sri Rajan, India chairman, Bain & Co., a global management consultancy, in August.

Among the private equity firms that contributed to a strong growth this year are India Value Fund that raised $700 million and Everstone Capital that raised $730 million. Multiples Alternate Asset Management, founded by former ICICI Ventures CEO Renuka Ramnath, is aiming to close a fund at $650 million. If that happens, the total raised by India focussed funds will atleast reach $4.5 billion, the highest since 2008. And it will soar even higher if ChrysCapital and Sequoia also manage to close their largest funds — worth $700 million each — this year.

Modi made greater ease of doing business one of his cornerstone pitches abroad, and said that he wants to see India in the top 50 countries in the World Bank’s Ease of Doing Business survey. Currently India is lagging way behind its BRICS peers at 142nd.

However, much depends on how swiftly the government can move on the promises it has made to foreign investors, particularly clearing regulatory and policy bottlenecks. Crucial legislation that was expected to spur investment, such as the Land Bill and the Goods and Services Tax (GST) remain stuck in parliament in the face of united opposition parties which have a majority in the upper house of parliament. That logjam shows little signs of thawing.

More private equity is obviously good for companies, as their revenues and earnings grow faster than at companies which do not have PE funding. “Private equity has often facilitated and encouraged investee companies to build strategic capabilities. Exports at private-equity-backed companies grew about 60 percent faster than those at companies not backed by the sector,” says this McKinsey report. Investors also push their companies to expand beyond national borders. “Private-equity investors helped investee companies by bringing to bear their global experience, foreign-market access, deal-making expertise, and networks,” the report said.

That is good news for early-stage companies looking to scale up, and is one reason why over three thousand companies have received infusions of PE capital. A report by Bain & Co. estimates growth on the order of 10-25 per cent in 2015, and more than 25 per cent across the next one to two years, in terms of investments made. That projection assumes that the government will be able to overcome legislative obstacles to reforms. The funds are there, and now it is upto the government to create an environment where investors would feel welcome to invest.


Comments are closed.