India’s private equity market continues to defy macro headwinds

PE activity in India this year won’t match the blistering pace set in 2021, but the sector remains healthy. AsianInvestor looks at how challenges and opportunities in the current global environment are affecting the outlook for the industry.
India’s private equity market continues to defy macro headwinds

If one macroeconomic development can safely be said to have dominated 2022, it’s clearly runaway inflation, which has prompted a radical and very high-profile monetary policy response by many central banks.

Surging inflation, and the ratcheting up of interest rates that has ensued, has put the brakes on activity in India’s private equity market, which boomed last year amid a fourfold jump in venture capital and growth investment, and a surge of almost the same magnitude in the value of exits.

Yet the outlook for the sector remains robust as investors with no shortage of dry powder continue to look to the country’s fundamentals.

Prakul Kaushiva, managing director of private equity at Toronto-headquartered pension fund manager CPP Investments, said India might suffer less from the effects of high inflation than countries in which prevailing rates had historically been lower.

“In the current environment, India is probably a little bit more immune to some of the global gyrations that are happening, because India has been a higher-inflation economy, but the underlying growth rates have been attractive” he told AsianInvestor.

“And as the rest of the world is now rebasing to higher levels of inflation, with slowing growth, the relative impact on India could potentially be lower. However, persistently higher inflation obviously poses a risk to investment and long-term growth in any country, and India is no exception ”

Kaushiva said it would be important to look hard at how particular industries are developing as the country’s economy is highly exposed to global macroeconomic shifts beyond its own factors.

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Arun Natarajan, founder of Chennai-based private company analysis firm Venture Intelligence, told AsianInvestor that the US Federal Reserve’s rate rises would affect American capital inflows into Indian PE.

“In the past, it’s been true that when the US sneezes, Indian markets – whether public or private –  catch a cold,” he said. “The Fed is tightening, and I would expect the Reserve Bank of India to follow suit – that's what has been happening, and they’ve been doing a tango for the last few months. But at some point, the differences in the two economies will start to show up and we’ll see more alternative sources of capital from outside of the US.”

Natarajan said the dynamic was a complex one for Indian PE, involving not only inflation in the US and the Fed’s response to it, but also equity values on public markets – those of technology stocks, in particular – and investor sentiment souring on China.

Naman Bansal, an associate partner and member of the private equity practice at Bain & Company’s New Delhi office, also painted a picture of falling valuations on public markets that he said would necessarily be reflected in the PE market.

He told AsianInvestor that a number of major listings had contributed to the spectacular leap in the value of PE exits in India last year, but added: “Right now, with the macroeconomic concerns, some of those listings are significantly down from their peaks. [Last year] proved that, yes, you can go to the public markets and potentially exit if you want to, but at the same time, in the last 12 months, macroeconomics have dictated that some of these valuations have come down, because globally and in the US, all of these tech valuations have come down.”


Natarajan said that although valuations among technology companies had suffered, the sector  nevertheless remained well positioned for continued growth and further PE investment, partly thanks to the fact that India’s tech ecosystem had developed more rapidly as a result of the Covid pandemic.

“We've not even started 5G in India, so lots of opportunities continue to be in front of anything that's digital, except they need to look beyond the top 500 million consumers,” he said.

Bansal said that investment in India’s tech sector could also experience additional growth as an effect of Russia’s invasion of Ukraine, despite the heightened uncertainty the war has created globally.

“Previously, Ukraine was growing as a hub for tech services,” he said. “A lot of companies were based there, and it had a large tech talent base. Unfortunately, the tragic consequences of the invasion and war there means that a lot of that demand is reorienting to countries such as India.”


Another geopolitical driver of activity in India’s PE market has been an investor pullback from China as the country’s government under president Xi Jinping has pursued increasingly statist policies and sought greater control over both domestic and international businesses operating there.

“We cannot ignore the vacant space that's been left by companies looking to diversify, if not choose between India and China,” Natarajan said. “India has a lot to gain. If you look at private equity, it’s obvious that folks that used to do typically a mix of China and India in a ratio of, 80:20 to 60:40 – Blackstone, Carlyle and so on – they’re probably now much, much more focused on India than they were earlier.”

Bansal expressed a similar view, saying: “The pullback from China is benefiting India, which is one of only two heavyweight emerging economies in Asia that funds focused on the region are investing in.

“The fact that India’s growing maturity as a market coincides with this, and the fact that there are plenty of good assets available in India, has created quite a fertile environment for PE investment.”

Cooler China sentiment among investors comes as part of a broader movement by companies to mitigate risk and diversify geographically.

“It started with Covid, with China, and now it’s getting even more exaggerated with Ukraine,” Bansal said. “[Companies] don’t want to depend on one country for all operations – they want to have a global base. So they don't want to be in a situation where one country shuts down due to whatever reason and their operations are impacted. That global phenomenon of just de-risking your supply chain is becoming increasingly important.”

Despite all of these influences on India’s PE market, a large measure of the positive outlook for the PE scene comes not because of developments in the global macro environment, but in spite of them.


Ben Chan, Ontario Teachers’ Pension Plan’s executive managing director for Asia-Pacific, told AsianInvestor: “The risks facing private equity investors [in India] are similar to those everywhere in the world, but as a long-term investor who is never a forced seller and can ride out turbulence, we feel well placed to invest in India private equity opportunities.”

Bansal said that in terms of PE market growth rates, India last year outperformed almost all other major markets, and that its stock of quality assets and the increased maturity of its PE market would underpin further growth in the space.

“The bottom line for why people invest in a country like India is arguably because the underlying growth trends are expected to continue,” Kaushiva said.

“India is the fifth-largest economy today, and the fastest growing major economy. So long as that dynamic stays, there should be opportunities to invest in India. Obviously, there’s an overlay of sentiment, which matters, but ultimately, at the ground level, growth potential drives appetite for investment.”

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