Total PE/VC investment activity in 2021 was at $77.1 billion, a 62% increase over 2020 levels. The PE asset class (excluding infrastructure and real estate) demonstrated a growth of 79%, says a new report released titled ‘IVCA – EY PE/VC Agenda – India Trend Book 2022’ at the IVCA Conclave 2022.
In the past decade, the PE/VC investment mix has changed significantly, progressing from primarily minority growth investments into one in which large buyouts have become a significant part of the overall PE/VC investment pie (by dollar value). PE investors are likely to emerge as a new category of promoters of Indian businesses in the next decade as their embrace of buyouts strategy comes in line with mature markets. Also, the rising level of stress in corporate balance sheets over the previous decade has provided some attractive opportunities for PE funds to buyout businesses with good brands/assets at reasonable valuations.
Infrastructure and real estate sectors have dominated buyout activity in the past decade accounting for over 50% of all buyouts by value and 40% by volume. However, in 2021, technology sector emerged as a preferred sector accounting for 57% of buyouts by value and 16% by volume compared to 24% by value and 10% by volume in the previous decade. This trend is in line with the global shift post the pandemic that has seen an increase in investments in the technology sector driven by acceleration in technology adoption by businesses and individuals.
Growth investments have become larger and more complex
Growth investments of US$19.6 billion in 2021 are lower by around 14% compared to 2020. However, growth investments in 2020 were propped up by mega investments worth US$15.1 billion in RIL group companies. Adjusted for these one-off deals, growth investment in 2021 are almost 2.5 times the value recorded in 2020 (US$7.8 billion, adjusted value) and more than twice the value recorded in any of the previous years. This growth was not only driven by higher number of deals but also by an increase in the average deal size. 2021 recorded 187 deals, 61% higher compared to 2020 (116 deals) and an average deal size of US$105 million, which is almost 50% higher than earlier years except 2020 which had a higher average deal size due to the mega deals in RIL group companies.
India emerging as a leading ecosystem for venture capital investments
2021 has been a record year for VC/start-up investments, recording an all-time high of US$28.5 billion which is almost four times the value recorded in 2020 (US$7.3 billion) and is almost equal to the total value of VC/start-up investments in the previous three years combined. Start-ups have emerged as the largest deal segment in 2021 accounting for 37% of total PE/VC investments. By deal volume, VC/start-up investment deals have been the highest ever at 858 deals, 37% higher than last year which recorded 628 deals.
As a fallout of the pandemic, VC/start-up investments were amongst the worst hit in 2020, declining by 38% on a y-o-y basis (US$11.7 billion in 2019) despite the number of deals declining by only 8% (628 deals in 2020 vs. 681 deals in 2019). After the onset of the pandemic, VC/start-up investments declined to a trickle (US$238 million in May 2020) as VC funds became more risk averse and refrained from investing in start-ups which traditionally had high cash burn rates.
However, as the pandemic progressed, there was an accelerated adoption of e-commerce/tech enabled businesses globally as well as in India, driven by the ease of use and convenience it provided. The pandemic also accelerated the learning curve for technology adoption and online commerce among the less tech savvy and first-time users.
E-commerce sector expected to be the fastest growing sector in India
The e-commerce sector has become one of the predominant sectors for PE/VC investments in 2021 recording US$15.9 billion, accounting for 21% of the total PE/VC investments in 2021 and more than five times the investments received in 2020. PE/VC investments in e-commerce in 2021 are the highest ever for the sector. The share of e-commerce would be even higher if we were to include other tech enabled online platform businesses like OTT streaming, e-learning, fintech, Logitech, etc. that have been excluded for this analysis (part of the parent sector vertical). After the onset of the pandemic, amidst the ensuing uncertainty, PE/VC investments in e-commerce declined to a trickle (US$32 million in May 2020) as funds became more risk averse and refrained from investing in e-commerce companies that traditionally had high cash burn rates. However, as the pandemic progressed, there was an accelerated adoption of e-commerce globally as well as in India driven by the ease of use and convenience it provided. The pandemic also accelerated the learning curve for technology adoption and online commerce among the less tech savvy and first-time users.
Established e-commerce businesses are seeing multiple rounds of investments, within a short span of time, at progressively higher valuations. As a result, many large established players have now amassed a significant warchest to further accelerate growth both organically and inorganically. This is also driving consolidation in the sector.
The interest was high not only amongst private capital investors, but also public equity investors as witnessed in the strong response to recent IPOs of e-commerce platforms like Zomato, Policybazaar, Nykaa etc. Investor interest in e-commerce has been so great that past investors have re-entered positions with their erstwhile investees at higher valuations, after having fully exited from them in the past, as seen in the latest US$3.6 billion funding round in Flipkart by Softbank, Tiger Global and others.
In B2C (business-to-consumer) e-commerce, both the traditional horizontal formats like Flipkart, as well as specialized vertical formats like Pepperfry, Urban Ladder, Firstcry and hybrid B2B/B2C models like Mogilix have seen significant PE/VC investments. Further, the emergence of influencer and social media led marketing and brand building has led to the emergence of a new segment of B2C model called D2C (direct-to-consumer) driven by brands like MyGlamm, WoW Skin Science, Mamaearth, etc. that are witnessing significant investor interest. The pandemic has also given a fillip to the demand for hyperlocal food and grocery delivery platforms like Swiggy, Zomato, Bigbasket, Blinkit etc., thus boosting their GMVs and valuations.
Another beneficiary of the pandemic has been healthcare delivery which has seen faster adoption of telemedicine as well as increased penetration by epharmacy platforms that have really raised their game by ensuring availability of SKU’s, competitive pricing, and faster delivery to challenge the dominance of local pharmacies. The pandemic has widened the chasm between the stronger players and the mid-tier ones, and has propelled the larger players into another orbit, who are now driving consolidation in each of their respective subsegments. A young demography, increasing internet and smartphone penetration, and relatively better economic performance are some key drivers of this sector. The growth in e-commerce will also drive allied industries such as logistics, supply chain, agri-tech and omnichannel sales solutions, which have already received higher investments in 2021
“As India moves towards its aspiration of realizing a US$5 trillion economy, the Indian PE/VC industry has an important part to play. Indian PE/VC investment activity could cross the $100 billion threshold in a couple of years, making it one of the largest PE/VC markets in the world, outside of US and China,” says Renuka Ramnath, Chairperson, IVCA, Founder, Managing Director & CEO, Multiples Alternate Asset Management Pvt. Ltd.