Why India Continues To Look Optimistic For PE/VC Funds

India has recently assumed the mantle of the fastest growing major economy in the world, and has witnessed a surging interest from both financial and strategic investors. The factors that have made India attractive are only gaining in strength, ensuring that it continues to be among the most sought after investment destinations.

Among the key drivers of investment optimism are the size and the stability of the Indian economy, structural reforms, and investment incentives, acceleration in deal activity and fundraising trends.

Bright Spot

India currently ranks seventh in the world by nominal GDP and third by Purchasing Power Parity (PPP). By 2020, its economy will cross $3 Tn to become the fifth largest globally, having overtaken the United Kingdom and France in the process.

India is also expected to grow at 7 to 8 per cent over the foreseeable future, double the global pace and four times that of the developed economies. This can largely be ascribed to the domestic nature of its economy that offers it relative insulation from global headwinds. Domestic consumption in India accounts for 55-60 per cent of GDP, giving it the flavour of developed markets. A burgeoning middle-class, rapid urbanization and a large workforce all contribute to superior growth prospects.

The country is also witnessing greater macroeconomic stability, thanks to reducing inflation, declining interest rates, falling budget and current account deficits, and strong foreign exchange reserves.

Reforms And Investment Initiatives

The present government has undertaken several measures to boost India’s economy and investment attractiveness. There is considerable emphasis on “ease of doing business” evidenced by structural reforms in manufacturing and labour, investment-friendly policies, easier regulatory norms, and attempts to reduce bureaucracy.

Various schemes and incentives for industry and infrastructure have been introduced in an effort to raise the manufacturing sector’s share in GDP to 25 per cent in the next five years. These include the flagship “Make in India” scheme, industrial corridors, investment and manufacturing zones, and smart cities.

Financial sector reforms to boost institutional investment include higher foreign ownership in insurance, liberalization of corporate bond market and broader mandate for pension funds to include equities and alternate assets. Furthermore, foreign investment norms have been liberalised in 15 sectors, including construction, defense, insurance, and railways infrastructure. The process to make Indian accounting standards consistent with global norms is also underway.

The government has streamlined indirect taxes and expressed an intent to reduce direct tax rates going forward. A favourable tax regime for real estate investment trusts and alternative investment funds points to a clear focus on attracting patient institutional capital.

Deal Activity

In the past two years, India has seen heightened interest from investors of all hues: Private Equity (PE) and Venture Capital (VC) investments have hit a new high, pension and sovereign funds have ramped up their exposure, and strategic investors have reposed their faith in greenfield investments and corporate takeovers.

Foreign Direct Investment (FDI) into India rose to $40 Bn in the year ended March 2016, a 30 per cent increase over the previous year. PE-VC investments aggregating to more than $30 Mn have been struck over the last 24 months. Over the same period, M&A deals worth $80 Bn were registered.

The hefty pace of PE-VC investment finds support in strong liquidity – exits worth more than $6 Bn were realised in 2016, maintaining the levels achieved in the previous year.

Fund Optimism And Commitment

India remains on top of the radar of global investors, a fact that has been reinforced by various surveys and investment patterns.

Pension funds and sovereign wealth funds, among the most sophisticated investors, have started accelerating their pace of investments in India. The recent past has seen significant commitments from large North American and European pension funds as well as leading sovereign wealth funds from the Middle-East and Asia. In a recent widely-followed LP survey, one in three investors said they are targeting investments in India, up from one in four last year.

The pace of fundraising is consistent with deal activity and investor optimism: India-dedicated PE/VC funds raised nearly $5 Bn in 2016, an almost 10 per cent rise over 2015. Consequently, dry powder with PE/VC funds – the committed and investible capital – stands close to a six-year high of over $7 Bn. Several funds are in the market to raise an additional $5 Bn, implying adequate capital commitments for future investments.

Conclusion

In 2017, India will continue to see growing interest and investments from PE-VC funds, both global and domestic. If and when the interest rate cycle in the West reverses, global investors will increasingly look at risk-adjusted returns and bankable liquidity options rather than just reallocating capital.

Investment structures are already evolving to facilitate large commitments from global investors within their policy frameworks. One such example is the preference for ‘platform deals’ among large investors who wish to commit substantial capital with pre-identified local partners. Such deals entail building an investment platform that aggregates assets of a similar type, such as real estate, infrastructure or renewable energy, in the hope of monetising it in the future through a listed trust. Going forward, more sectors and asset classes can be expected to innovate and evolve in their quest for PE-VC funds.

[Correction: An earlier version of this story mentioned India’s GDP as $3 Bn. This has now been corrected to $3 Tn.]