New strategies are driving nuanced growth in India's private equity sector

10 December 2018 4 min. read
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India’s private equity market is on the path to steady growth, driven by an increase in the available pool of capital and a tendency to learn from past mistakes, although the sector now faces a host of new challenges according to a new report from global management consultancy McKinsey & Company.

Several analysts have reported strong growth for India’s private equity sector in recent years, and have predicted strong growth in years to come. According to McKinsey & Company, this growth has been driven buy a reorganisation of priorities within the sector in line with the contemporary scenario.

The Global Financial Crisis of 2008 dealt a blow to the private equity sector across the globe, which forced a number of firms to develop new growth strategies. McKinsey reports that this new strategy has led to steady growth across all dimensions of the sector, including fund-raising, investments and exits.

Private Equity investment in India

Bain & Company reinforced this perspective earlier this year, reporting that the volume of funds raised in India reached a value of just under $6 billion last year, which represents a growth rate of 50%. According to McKinsey, a number of factors have contributed to this strong performance.

The report states that the growth has been “helped by global liquidity and the inability of other domestic sources of capital to keep pace with a growing economy.” Improvement in global conditions has accentuated the effects of an already booming private equity sector in India.

As per the report, investment in the Indian market form private equity firms has exceeded $97 billion since 2003, a figure that does not incorporate investments in the real estate asset and venture capital domains. In essence, the sector has been strong for over a decade and the financial crisis has proved a temporary obstacle.

Investment intensity in India

The recovery from the financial crisis is confirmed by the fact that the capital deployed in India’s private equity sector last year was higher than any other year since the financial crisis, while India occupied over 2% of the global share of investments between 2015 and 2017.

This growth, as per the firm is “influenced by a combination of factors, including investors’ needs for higher returns as well as declining returns in other asset classes.” India's economy is growing at a rapid rate, which explains the growing demand for returns. Nevertheless, the sector is set to face a multifaceted set of transformations in the near future according to the firm.

Firstly, the number of global limited partners (LPs) is rapidly on the rise, and these entities are upping the deployment of capital to private equity, primarily by leveraging local sources of capital. As the LPs increase their investment, the level of competition in the sector is reaching unprecedented levels.

India share in global private investment

Another trend that is affecting the Indian markets is the increasing tendency of banks to unravel loan profiles that are increasingly under strain, which increases the operational risk on the one hand, but also creates a host of new opportunities to restructure.

Lastly, the sector is facing a similar challenge as most others, namely an increase in competition from new smaller but more specialised businesses that leverage state-of-the-art business models and attract investment away from large firms. These firms are more flexible in their approach, and even in their partnership structures.