SUMMARY
Number of PE/VC investments increased but the value of investment declined in 2018
Ecommerce, retail and financial service space received the maximum PE/VC investment
Biggest impact of PE/VC investment has been observed on infrastructure and real estate sector
As compared to the year 2017, the number of PE/VC investments during the year has increased but the value of the investment has declined. According to the deal tracker report prepared by EY, the reason for a decline in the value of the investment is mainly due to lesser deals with high investment value.
The biggest impact on PE/VC investment has been observed on the infrastructure and real estate sector. According to EY Private Equity Deal Tracker, the PE / VC investments in the third quarter has declined by 23% in value in these sectors.
The ecommerce, retail and financial service space has received the maximum PE/VC investment during the year. Investment in the startup space during the third quarter of 2018 has been an all-time high since the second quarter of 2015. A lot of startup in the ecommerce and service space have received investment during the year.
Some private equity players have adopted a three-layered structure as compared to the usual two-layered structure. A standard two-layer structure which involves a local investment arm investing in Indian Companies and a foreign arm being the holding company. Whereas the three-layer structure was especially adopted where the holding company is a listed entity, wherein there is another foreign company between the holding company and the local investment arm.
With the increasing awareness of the local laws and the risk involving exits, there has also been an increasing trend in the number of investments involving a joint venture structure and buy-out. The private equity funds now prefer to adopt a joint venture structure with the Indian promoters where the funds hold a controlling interest in the investee company there assuring proper governance and control over the affairs of the Indian entity.
There has been a substantial increase in the private equity investment in startups with co-investment structure. The Indian Company issues hybrid investments which are usually a mixed bag of equity and compulsorily convertible instruments convertible based on a future date based on then financial numbers.
Regulatory Shifts In 2018
During the year 2018, the enforcement of certain regulations have boosted investor confidence and have played a vital role in driving PE/VC deals. The effective and time-bound enforcement of the Insolvency and Bankruptcy Code 2016 (“IBC“) has played a vital role for the scope of expansion of existing business at attractive valuations.
The other the key driver for PE/VC deals during the year were foreign exchange regulations and the tax laws. The foreign exchange regulations have always played a vital role from the Investors standpoint as these regulations impose a bundle of restrictions on the Investors both at the time of entry and exit, enforcement of commercial understanding typically in relation to escrow arrangements, indemnity provisions.
Key Deals Of 2018
The deal which has been in limelight for the largest time is the acquisition of Flipkart by Walmart which involved exit by both private equity and venture funds. Walmart provided an exit to key private equity players namely Softbank, Tiger Global Management, Accel Partners, Nasper along with promoters and certain other shareholders.
The deal also involved an investment of $2 Bn into Flipkart with the right to further invest upto $3 Bn any time after completion of the acquisition and first anniversary of the completion.
Other notable investment deals include investment of $1 Bn in OYO Rooms by Lightspeed, Sequoia, SoftBank and Greenoaks; investment of $1.43 Bn in HDFC Limited by GIC, KKR, OMERS, Carmignac Group, Premji Invest; investment of $1.4 Bn in Paytm by Softbank; investment in Swiggy by Coatue Management, DST Global, Naspers.
Exits Seen In 2018
The common exit strategies recently adopted by PE/VC among others include the initial public offer, secondary sale and acquisition by promoters. The majority exits during the year 2018 in terms of the values have been by way of strategic and secondary sale.
Some key exits during the year includes exit by Helion Ventures, Accel India, Bessemer and others in OLA by way of secondary sale; exit by TPG, Airplaza Retail Holdings in Vishal Mega Mart Private Limited by way of secondary sale; exit by TPG, CX Partners in Healthium Medtech Private Limited by way of secondary sale; exit by SAIF Partners in Persistent Systems Ltd.
There has been various factors which has inhibited the PE/ VC transactions during the year 2018. The implementation of new regulations, endless compliance and consistent amendments to the tax laws has affected the confidence of investors.
Further, the recent decline in rating of NBFC Companies has led investors to take a more cautious approach. The other factors namely fluctuation in foreign exchange currency price, global trade war, etc. have affected global investment by PE/ VC funds during the 3rd quarter of 2018.
Investor Interest
The investors have witness a huge scope of development in companies engage in the ecommerce business. With the view to provide greater clarity in the e-commerce space, the government is coming up new and comprehensive e-commerce policy to regulate these businesses. These will certainly bring a lot of clarity for the investors and would boost investor confidence for investment in such companies.
Further, with the scope of development in infrastructure sector in India, certain relaxations would play a vital role for larger investments. The India government should also take stringent against defaulting developers for effective enforcement of the Real Estate (Regulation and Development) Act, 2016 (“RERA“) to boost investor confidence in the real estate sector. The digitalisation of the approvals process in the infrastructure and real estate sector will also boost investor confidence in these sectors.
What More Does The Sector Need?
A strong corporate governance policy is a key for increasing investor confidence. The government have been making efforts to have a strong corporate governance and making directors responsible for actions to be undertaken by them. Further initiative like “Make in India” and “Ease of doing business in India” will certainly boost PE/VC investments.
With the scope of new business opportunities in the service sector and ecommerce industry and more entities being available to acquire pursuant to the IBC regulations, India may see a large amount of PE/VC investments in 2019. However, with the upcoming 2019 budget and Loksabha elections the investors may perhaps taking a more cautious approach for investments in India during the first half of 2019.
