December 15, 2022 | 8 Minute Read
Head of Private Equity in Asia and Global Co-Head of Growth Equity
In investment circles, the definition of “Asia” is evolving. Particularly in the private markets, investors have typically used “Asia” as shorthand for China or Japan. In recent years, however, India has become an increasingly popular market for both fund managers and capital allocators. Much of the broader appeal comes from the sheer size of the opportunity, with India recently surpassing the UK to become the world’s fifth-largest economy. India’s trajectory is strong too, thanks to a young and highly educated population combined with rising adoption of the internet, ecommerce, and other technology. India’s GDP growth exceeded China’s in 2021 and is expected to more than double in 2022.1 By 2050, the Indian economy is anticipated to grow to $30 trillion.2
Over the last decade, private market activity in India experienced a growth phase followed by a plateau in activity. The COVID-19 pandemic served as a catalyst for another step change, with invested capital hitting all-times highs for three consecutive years through 2021. Part of this follows the trend of private markets more broadly, but India is also enjoying tailwinds from regulatory changes and increasingly pro-business sentiments. Public equity markets in particular are undergoing needed reforms, providing increased exit opportunities while also encouraging a new era of startups and entrepreneurs.
Historically, private market activity in India has been focused on non-control transactions, with a skew towards venture capital. Deals tended to be smaller, either focused on startups or family-owned businesses that preferred to only sell small ownership stakes. As with other countries, however, there has been a push towards greater institutionalization of businesses as well as heightened understanding and appreciation for the merits of outside equity ownership. This has led to larger transaction sizes broadly, including an increase in majority buyout deals. While buyouts are becoming more common, minority transactions remain the norm even in more developed companies.
Indian private markets remain young but are rapidly maturing, leading to new and expanding exit opportunities that propelled activity to an all-time high in 2021.3 Sales to strategic acquirers are the predominant exit route, but growth in the private market ecosystem has led to an increasing rate of secondary buyouts, with subsequent periods of institutional ownership helping to build best practices that permeate beyond a specific company or industry. As financing evolves to meet needs at specific stages of the company lifecycle, new deal types and structures have taken hold, including structured pre-IPO rounds.
In the past year, companies have been opting for private market funding rather than entering India’s public market. Part of this trend has been due to the prevalence of private capital, but shortcomings in the IPO process and restrictive public market regulations have also deterred companies from listing. Loss-making companies have been effectively restricted from public markets, with stringent lockups and low liquidity. With few new public market opportunities, crossover investors including mutual funds have become active participants in private markets. Domestic firms have also sought out pre-IPO opportunities, raising funds from local high-net-worth investors.
Source: Venture Intelligence, Bloomberg, Goldman Sachs Global Investment Research. As of November 2022.
As a result of the deterrents to new listings, India’s public markets are currently dominated by older companies in legacy industries; financial services and energy account for nearly half (47%) of the SENSEX market cap, compared to only about 15% of the S&P 500, which is more heavily weighted towards IT, healthcare, and consumer discretionary. This has left significant room for additional listings and market cap expansion.4 In response, the Securities and Exchange Board of India has enacted reforms around governance and public listings, especially for high-growth companies with no earnings. Some examples include reduced lockups, fewer conditions for migrating to the main board, and the allowance of discretionary allotments. The reforms represent a step towards aligning India’s capital markets with global best practices and seem to already be having an impact, with IPO activity increasing alongside gains in the public markets in late 2021. IPO activity is down YTD in 2022, however, reflecting the broader slowdown in global markets.
The dynamics between public and private markets in India require investors to develop the requisite skillset to navigate both. India’s growth story parallels China’s in many ways, beginning as hub for outsourcing and export-oriented business that drew initial investment before developing into a more mature market with attractive domestic opportunities. As a result, success in India is also largely predicated on the same cornerstones of the playbook that dealmakers initially applied in China: marrying the deep local knowledge and on-the-ground presence required to navigate a vast country with complex systems, together with the international experience and connections needed to build partnerships and expand operations globally.
With heightened interest from both fund managers and capital allocators, India has seen a spike in private market fundraising in recent years; however, absolute levels of dedicated capital remain low. Many of the most active financial sponsors in India are global firms with a local presence. Most of the capital allocators in these vehicles are also based outside of Asia, predominately in the US, Europe, and the Middle East. Even as more capital is deployed in India, many institutional investors remain significantly under allocated relative to the size of the market. One ongoing hurdle for this group is the high costs to hedge exposure to the rupee, given the volatility of the currency. This is particularly challenging for strategies with lower risk/return profiles, where hedging costs can eat materially into investment returns.
China-based funds were also early entrants to the Indian market, but the universe of India-based funds is quickly expanding. Still, investment activity has outstripped domestic fundraising in recent years, with many large general partners (GPs) investing via regional funds rather than India-specific vehicles. In addition to a large foreign manager presence, the private market landscape in India looks different than many other geographies, including relatively less activity from closed-end funds. In addition to the crossover fund mentioned previously, India has a high concentration of fundless sponsors that raise capital to finance specific deals.
Source: Preqin Pro. As of December 2021.
Rising competition has pushed up valuations, particularly in areas popular during the initial uptick in private market activity a decade ago, such as consumer tech and fintech. As dealmakers become more familiar with the India ecosystem, financial sponsors are expanding into new geographies and industries, looking beyond well-known centers like Mumbai and to large yet growing hubs like Hyderabad. The IT sector remains the cornerstone of activity and currently accounts for more than 60% of investment, partially attributable to the slant towards venture capital investment, whereas traditional consumer and enterprise categories are more prevalent in development markets.
India’s large population of young, educated, English-speaking, digitally savvy people is particularly well-equipped for the IT services sector, creating a strong foundation for expansion in global markets. During the pandemic, India proved its viability as a tech outsourcing destination with companies continuing to deliver services to an international clientele. The pandemic also exposed global supply chain vulnerabilities, leading many to broaden capabilities in India and elsewhere to reduce concentrated exposure to single markets such as China, in what is often referred to a “China Plus One” strategy. In addition to outsourcing capabilities, India is a large market in and of itself, with considerable domestic consumer opportunities due to a longer period of underinvestment.
Indian office real estate has seen a wave of investment over the past two decades, growing to become Asia’s largest office market. Much of this growth has been driven by the IT sector, with expansion in markets such as Bengaluru and Hyderabad. The growing market has led global investors to increase allocations to commercial real estate, with numerous large portfolio acquisitions completed in the past five years. Relatively recent passage of REIT legislation has also resulted in the launch of public REITs dedicated to owning commercial real estate as the sector continues to institutionalize. At the same time, the residential sector is witnessing strong demand trends driven by continued income growth and urbanization. An improved regulatory framework and consolidation to higher quality developers are also supportive of a more balanced and healthy real estate market in the long term. As the country continues to grow, rising consumerism and urbanization will fuel the need for more private investment in new economy sectors such as logistics facilities and data center assets.
India’s population is set to surpass China’s by 2030, but high recent growth and a strong forward trajectory have resulted in some growing pains. Investment in basic infrastructure is required; sustainable energy will be needed going forward, presenting both challenges and opportunities. India has a high need for energy and nearly three-quarters of its electricity comes from coal, resulting in the third-highest level of emissions globally and concomitant pollution that often impedes daily life. India is also highly dependent on oil and is a net importer, which has resulted in fuel shortages. Refining plays an important role in the economy, however, with India a net exporter of refined products, further complicating the situation.5
While the low dependency ratio puts India in a favorable position, the country still requires expanded medical access, including fundamental services like hospitals, to meet the needs of the growing population. The private sector has been particularly active in multi-specialty hospitals as better quality and more complex treatment options are sought out, with double-digit growth rates expected through at least 2025.6 Given India’s needs and competitive advantages, healthcare services is an area with a strong outlook as technology can be leveraged in a variety of ways to both meet domestic needs and build scalable businesses that compete on a global level.
India benefits from demographic tailwinds and recent reforms that have improved the environment for business, but the country is far from realizing its full potential. Despite favorable demographics, labor force participation has fallen over the last decade.7 Internet usage is high on an absolute basis, but penetration is low relative to global figures and other Asian countries. Modern infrastructure, supported by sustainable energy sources, will be needed. With the right reforms and continued improvements, India’s market growth could exceed 8% annually over the next decade.
Going forward, private market investing in India is primed to grow in tandem with the country. The improvements required across India will present opportunities for investment. Fund managers, both local and abroad, are benefitting from maturation of the market and developing new ways to support companies. Capital allocators have new ways to access private market companies at all stages of developments. Developments in public markets have made the route to exit clearer, encouraging a new wave of startups and entrepreneurship.
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1 Goldman Sachs Global Investment Research. As of October 2022
2 EY, Indian Economy by 2050: In Pursuit to Achieve the $30 Trillion Mark. As of August 25, 2022
3 Bain & Company, India Private Equity Report. As of 2022
4 Goldman Sachs Global Investment Research. As of September 19, 2021
5 Goldman Sachs Global Investment Research, July 4, 2022
6 Bain. As of June 2022
7 Goldman Sachs Global Investment Research, August 5, 2022
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Date of First Use: December 15, 2022 298110-OTU-1702784