2018 was a year of anticipation in the lead up to the 2019 Indian general election, with a mixture of optimism and caution in the air. The year ended with 26 private equity funds having reached a final close, securing aggregate capital commitments of $3.3bn, compared to $3.6bn in the previous year, as shown in the chart below.
While concerns over valuations adversely impacted the number of angel/seed financings in the year, later stages of the venture capital spectrum gained traction and represented a larger proportion of deals compared to 2017. Despite the slight dip in fundraising and deals, sentiment from the ground indicates that there is confidence in the overall fundraising landscape. As echoed in a recent conversation Preqin had with an India-based private equity fund manager, the fundraising ecosystem has been robust due to the success of government initiatives. In 2018, average fund size increased by 20% from 2017 as managers raised larger vehicles, and a larger proportion of funds met or exceeded their original fundraising targets (78% vs. 45% respectively), demonstrating high investor confidence and a buoyant fundraising environment.
Following 11 consecutive years from 2002 to 2013 in which managers called up more capital than they distributed, this trend reversed in 2014. Notably, 2016 was a stand-out year: India-based managers distributed $6.2bn to investors, more than double what they called up ($2.9bn) over the same period. This trend has sustained and in H1 2018 net cash flows were still in positive territory, with the momentum of distributions likely to continue given the present positivity surrounding the industry.
Within fundraising, this enthusiasm is magnified in one area: start-ups. In 2018, two-thirds of India-based private equity funds raised were venture capital vehicles. Based on conversations with India-based GPs, the success is attributed to government-backed programs such as Startup India and Make In India. A fund manager based in a Tier II city in India noted that with an increasing number of start-ups established in Tier II and III cities, the government has decided to shift its focus to them; they remarked that it was only a matter of time before these cities reach the apex of their Tier I counterparts, the likes of Delhi, Hyderabad and Mumbai.
Capitalizing on these government initiatives, industry players latched on to the idea of ‘entrepreneurship’ – a key factor contributing to the rise of venture capital in India. A Chennai-based fund manager told us it is common for seasoned professionals with 10-15 years of experience to jump on the entrepreneurship bandwagon and start their own venture capital firms. Similarly, private equity investors hold the same view. Veterans of family offices leverage their experience to invest in sectors they are most familiar with and that relate to their core businesses where they first made their fortune.
Private wealth investors, such as family offices and wealth managers, make up the largest proportion (36%) of private equity investors. Family offices have greater autonomy in making decisions and typically hold longer-term views of their investments, which makes them a critical source of funding for early-stage companies. In addition, government initiatives have gradually institutionalized the venture capital space, providing assurance for investors to participate.
Steady government support and an ecosystem of upbeat stakeholders remain catalysts of growth for the private equity & venture capital landscape in India. Nevertheless, there is uncertainty stemming from the upcoming elections and interest rate volatility that loom over the future of the industry. Investors and fund managers that Preqin spoke to were of the opinion that growth in the private equity & venture capital environment will be slow, but is likely to pick up after the 2019 elections.
Click here to download a copy of the Preqin Private Equity & Venture Capital in India Report, featuring exclusive commentary from IVCA, CDPQ India and ICICI Venture.
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