Pension chief: India a bright spot for PE, VC investments

India’s appeal as a private equity-venture capital destination remains intact despite a recent softening in deal flows, according to the top executive of an Indian pension money manager.

“India continued to be a bright spot for private equity and venture capital (PE-VC) investments, with investments surpassing U$60 billion for three consecutive years since 2020,” Sriram Iyer, CEO of India's HDFC Pension Management Company, told AsianInvestor.

Despite waning global market sentiment brought on by geo-political uncertainties, tightening monetary policy in developed markets and supply chain disruptions, India’s PE-VC ecosystem remains resilient, he said.

“The short-term outlook remains dependent on a number of emerging challenges such as possible global recession, the re-emergence of inflation and any escalation of geopolitical tensions. However, the medium to long-term outlook remains positive,” said Iyer.

HDFC Pension Management is one of 10 pension fund managers that operate under the National Pension System (NPS), a voluntary defined contribution retirement savings scheme introduced by India's central government in 2008.

The company is a wholly-owned subsidiary of local insurer HDFC Life Insurance.

VIBRANT BUT BUMPY

After three exuberant years in India’s PE-VC landscape, the first six months saw an overall softening of pace in deal value in the first half of 2023, according to Bain and Company.

Yet, the third quarter is already showing roots of optimism as deal value is expected to hit $13 billion – a 60% growth over the first quarter, according to the private markets consultancy.

A key standout this year has been the emergence of environmental, social and governance (ESG) as a breakout investment theme – more significant than any other sector-specific theme.

“ESG-aligned assets attracted $4.5 billion in investments, with $1 in $5 of PE-VC investment going to ESG,” the half-year report said.

Iyer said that while PE-VC investments can help pension funds generate higher returns, these investments are illiquid and riskier and need to be made for a long period of time. Such investments, therefore, require extensive due diligence.

“Further considering the current NPS architecture and smaller fund size, there is need to maintain sufficient liquidity in the fund to meet the redemption requirements and thus such investment are currently not being made. However, as the fund grows we can look to invest in these spaces to generate higher returns while meeting the liquidity requirement,” Iyer added.

Under current regulatory guidelines, most pension funds are invested in listed markets – equities and corporate bonds, where prices are available for daily mark-to-market valuations.

“While pension funds have to declare net asset value daily, given that private markets are relatively illiquid, the ability to arrive at a fair price on a daily basis needs to be evaluated,” added Iyer.

Under the NPS architecture, subscribers have access to four asset classes – equities, government bonds, corporate bonds and alternative investment funds.

Subscribers cannot have more than 5% of their allocation to alternatives.

Alternatives investing can only occur via alternatives investment funds – pooled investment funds that invest in hedge funds, private equity and venture capital and are considered different to conventional investments.

PRIVATE MOMENTUM

Iyer believes that private markets will continue to grow and elicit interest from investors as India’s GDP expansion continues to outpace the rest of the world. Pension funds will be no exception. 

“As the assets under management of Indian pension funds increase in coming years, the regulator may look at allowing investment in other categories, including private markets, overseas assets, etc,” said Iyer.

India is home to 100-plus unicorns – startups with valuations of $1 billion and above – as of early October, according to government data.

Several institutional investors disappointed by China’s slow recovery and lack of new growth drivers are turning to India and Southeast Asia for private deals – although these markets are smaller and offer relatively limited exit options.

India is already a magnet for large pension funds and sovereign wealth funds scouting for renewables and infrastructure investments.