How will India’s private capital market fare in 2024?

The IMF has described India as a ‘bright spot’ amid tepid global growth. What are some of the biggest factors or determinants affecting investment into India in 2024?

Vikram Gupta: The growth in 2024 will be driven by several key factors:

• Continued stability of the government post-elections, making the election results crucial.

• Reduced interest rates, which will attract more foreign investment to India. Currently, 85% of the capital in India’s start-up ecosystem is from foreign investments, making it likely that, if interest rates soften, individuals will redirect their capital toward the growth economy.

• Non-deployed dry powder in the previous years: many individuals and funds have been holding onto their cash, with several funds that raised capital yet to deploy their funds. These entities are now beginning to open their processes, leading to increased deployment.

The convergence of these three factors is expected to create a multiplier effect. This will likely result in growth, particularly starting from May/June onwards.

Rittik Chakrabarti: Multiple factors will encourage capital deployment into India this year:

• A potential re-election of the incumbent Bharatiya Janata Party (BJP) government in the 2024 Lok Sabha elections will provide continuity in economic reforms and policy.

• The China Plus One strategy, continued diversification of global supply chains, and the leveraging of the Make in India program will drive investment in the manufacturing sector.

• The quantum and timing of the US Federal Reserve (Fed) rate cuts will impact the inflow of foreign capital in 2024. The market expects the Reserve Bank of India (RBI) to be slow to cut interest rates and is not anticipating any rate cuts in the first half of 2024.

• Infrastructure upgrades, both digital and physical, will be a force multiplier for the economy.

• India aims to reach net-zero emissions by 2070 and produce 50% of electricity from non-fossil fuel sources by 2030. This should create more opportunities in the renewables and green energy sectors, with more than $700bn in energy investments planned.

• The emergence of a strong middle class, favorable demographics, and under-penetration of goods and services will fuel consumption and demand for premium products.

However, there are also detrimental factors to consider:

• Global economic slowdown, higher interest rate environment in the US, and higher oil prices will be the biggest impediments to India’s GDP growth.

• International investors and companies may choose to defer their investing agenda until after the elections, which may lead to a temporary slowdown in activity.

2023 felt like a year of markdowns (or valuation correction) for private equity in India. Is that going to change in 2024?

Vikram Gupta: In retrospect, last year may have felt like a year of markdowns, primarily because of a lack of active investor participation, and not necessarily because of underperforming companies. With the increasing deployment of capital, the dynamics of the demand-supply situation for capital are poised to change. This shift is expected to result in multiple term sheets for capable entrepreneurs, driving valuations higher.

Presently, valuations remain fairly muted, but the trend will likely shift toward higher valuations in 2024 as more capital becomes available. Anticipating corrections in valuations, especially in cases where it appears excessive, means that investors need to exercise caution. Similarly, entrepreneurs must be prudent in selecting the right investors, even if they receive high valuations.

Rittik Chakrabarti: After the euphoric valuations for private assets in 2021–2022, there has been a valuation reset. The paradigm has shifted from growth at all costs to improving unit economics and scaling up profitably. Last year, we saw a lot of start-ups growing into the valuations of their 2021–2022 funding rounds. A lot of other start-ups delayed going to the markets for fundraising in an adverse environment and focused on extending their cash runway.

Despite this, there is record dry powder with private equity and venture capital (VC) funds investing in India, so the top two or three companies in any sector may continue to receive premium valuations but the laggards may not in the current environment.

Globally, this year will likely be characterized by an urgent need to return capital to LPs through creative exit strategies such as the use of continuation vehicles and net asset value (NAV) loans.

2024 is also an election year in India. While much can change in the next few months, it is looking like Narendra Modi and the BJP are well-placed to win the elections. What is the short- and long-term impact of the elections on fundraising and deal-making/exits?

Vikram Gupta: In the private market domain, where venture capitalists play an active role, we believe that investors will look at it from a long-term perspective. Consequently, they will perceive government stability positively over the next five years, leading to increased investment in private markets. Currently on the sidelines, foreign capital deployment is expected to rise post-elections. I anticipate heightened deal activity in the third quarter, with some activity in the latter part of the second quarter. The third and fourth quarters of the year are likely to surge in deal-making.

Rittik Chakrabarti: A lot of secular factors are driving the India growth story so, irrespective of who wins the Lok Sabha elections, India is poised to be a growth engine of the world in the medium term.

According to Preqin data, India-focused private equity and VC funds’ assets under management (AUM) has continued to grow over the years, from $35.1bn at the end of 2018 to a record $68.5bn as of June 2023.

India’s IPO market has exhibited a strong recovery in 2023 and is expected to remain red hot given the strong IPO pipeline. India’s exit market has deepened and diversified over the decade. Aggregate exit value has nearly quadrupled, from $3.7bn in 2013 to $13.2bn in 2022. With alternative markets in India maturing, managers will explore creative solutions – such as GP-led secondaries – to return capital to LPs.

Private credit is also witnessing rapid growth in India. Why should (and how can) investors access this asset class, given it is fairly new and unfamiliar to most?

Vikram Gupta: Utilizing credit for start-ups proves to be an effective strategy to sustain growth without diluting existing stakeholders in their cap tables. Typically, various forms of credit come into play in the later stages of a start-up’s journey, often beginning around series B. However, a noteworthy trend is emerging with private credit in the form of venture debt, making its entry even in series A rounds. Anecdotally, around 500 start-ups in the country have secured venture debt funds.

A common thread among these companies is the presence of a VC fund that has paved the way for venture debt funds. This trend is attractive to investors due to a substantial gap in the demand and availability of credit. Depending on the risk level and credit evaluation methods employed, much of the assessment hinges on the credibility of the investor in the cap table and the available cash flow over an 18-to-24-month period. The opportunity in this space is poised to expand, with the persistent gap ensuring its relevance.

Rittik Chakrabarti: Private credit deals in India recorded a deal volume of $4.5bn in 2022, a 72% increase over the prior year, as Indian companies sought alternative funding amid the volatile equity markets and a slowdown in bank lending.

As of June 2023, the AUM of India-focused private debt funds reached a record $21bn, growing over 3x in the past five years. The proliferation of private credit (as a percentage of GDP) is still low compared with the US and Europe, so there is room for this asset class to grow.

Private credit offers diversification away from traditional equity and fixed income investments, potentially reducing overall portfolio risk. Compared with traditional fixed income products, private credit in emerging markets like India can offer higher yields due to the higher risk and illiquidity premiums. Furthermore, India’s economic growth can lead to opportunities for lending to sectors that benefit from this growth, such as infrastructure, technology, and consumer-driven industries.

^{The opinions and facts included in the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin, IvyCap Ventures, and Houlihan Lokey accept no liability for any decisions taken in relation to the above.}