Amidst fears of a global slowdown, homegrown private equity investors are bullish that the Indian stock market is far more stable and resilient today and offers innumerable opportunities for exits. The optimism comes despite tapering exit activity in the past few months on account of macroeconomic uncertainties and market volatility.
“Private equity fund managers by nature want to buy and hold assets. They need to sell in order to prove themselves. I hope the industry steps up and cashes in on the opportunity and increases the confidence of LPs in the Indian alternatives system,” said PR Srinivasan, Founder & Managing Partner, Xponentia Capital Partners during a panel discussion at DealStreetAsia’s Asia PE-VC Summit 2023.
“Taking the companies from Series B to E stages involves a lot of corporatisation and creating a middle layer in order to make them look attractive to a buyer or strong enough to do an IPO. So, our constant efforts are to identify those entrepreneurs we can develop good chemistry with while fulfilling their capital needs and other requirements,” Srinivasan added.
According to the panellists, the market is going to get bigger and the Indian mid-market and venture capital space will be dominated by domestic investors, with Indian general partners (GPs) taking over a substantial chunk of the market backed by Indian limited partners (LPs) going forward.
Asked if a fund should involve a healthy mix of domestic and foreign entities, Motilal Oswal Alternates managing director Vijay Dhanuka said, “We always want a good balance of domestic and international capital in our funds. While in our earlier funds, we had more global institutional investors, in the third and fourth funds onwards we started approaching domestic HNIs, and the fundraising turned out to be quicker than traditional fundraising from international LPs and institutions. In the last ten years, HNIs have evolved and started understanding the private equity space better.”
On the mix of LPs in their new fund, Somerset Indus Capital Partners Managing Partner & Founder Mayur Sirdesai said, “Our first fund, which was in 2011-12, comprised only overseas LPs. About 35% of the second fund’s corpus came from Indian investors. For the third fund, we expect the percentage of domestic capital to go up to 45-50%. We have the support from the likes of NIIF and BIRAC.”
“The institutional pool in India is becoming fairly large. From government-backed funds and family offices to insurance companies and high-net-worth individuals (HNIs), there’s no shortage of domestic capital,” Sirdesai added.
Somerset is in the process of raising $200 million for its third fund. It has already received soft capital commitments of $70 million from existing limited partners (LPs).
More discipline in investing
Commenting on the recent incidents of corporate governance lapses, valuation dips and mass layoffs in the startup ecosystem, Dhanuka said, “Yes, investors are to be blamed for whatever is happening to a large extent. When things are looking up, there’s always this feeling of FOMO (fear of missing out). When there’s a lot of capital at disposal, one gets into the race to deploy it faster or at least at par with other funds. People would put token money here and there thinking they would hit the next Flipkart or Nykaa. A lot of mistakes are made in the process.”
“A lot of top dollar valuations in the past decade have been paid without having done a fair amount of diligence on the quality of the business, the management, and the achievability of the business plan. As an investor, it is as important to say no as it is to say yes,” he added.
On valuation corrections, Dhanuka said, “Valuation is a function of what the business is going to deliver. If one overestimates that a business will grow at a compounded rate of 100% for the next 10 years, a write-off can’t be avoided because it is impossible to grow the business at that rate for a long period. Reasonable growth standards must be fixed. If one is disciplined at the time of entry, they need not worry about what will change in the future.”
Industry players foresee more discipline in investing in the startup space as everybody is now focused on sustainable growth and profitability.
“In the PE space, an investor invests for a five to six-year cycle. So, one needs to be disciplined when it comes to undertaking due diligence and calculating IRR. Investors also need to ensure that they are spending time with the right promoter and backing the right promoter. Unlike in past years, investors are treading more cautiously and taking longer to close deals. Profitability is their key focus area,” Srinivasan said.
Asked how soon would the firms be able to deploy their funds given the current market situation, Sirdesai said, “If we look at just healthcare, which is our core investing area, the deal flow is very strong. In general, healthcare grew by $300 billion in 10 years till 2022. We expect it to grow by another $300 billion in the next five years. Every sector is showing that scale. Deal flow is not a challenge in India. There are enough opportunities out there in the Indian market and funds are continuing to deploy capital.”
“Startups may have had a summer but we didn’t have a summer in the mid-market space. Mid-market was a moderate climate all around. We did not pay extraordinary valuations in the last three years. The only time I remember when there was crazy pressure to deploy capital was in 2007-08. That was the time when term sheets were being agreed on in a day. That is not happening today. One just needs to be patient with spotting the right deal,” Srinivasan added.
On future growth prospects, Dhanuka said, “We are long-term investors and feel that in the long term, India is in a solid state right now. Over the last 25 years, Indian GDP has grown at a compounded rate of 9%. This is 2x of the world average. If India continues to grow at this rate for the next 25 years, we will see a very different India.”
