Does 2023 looks brighter for Indian Private Equity?

After a muted year in Chinese Private Equity in 2022, thanks to the zero-Covid policy in Chia, there is a diminished appretite for Private Equity in APAC region. PE funds raised in 2022 stood at $71.8billion against 103.9billion a year ago. Deal size are also increasing with fewer deals, which shows more concentration in PE business in APAC region, particularly in Chinese PE market. Moreover, investment cycle is getting longer - earlier it used to take 12-18 months to deploy the capital raised, and 3-4 years to exit the deal unlike now, when raising capital,exiting the deal and due-diligence all are taking much longer.

As the investment dollars are reducing in China, dry powder were the only source of investment in 2022, there are more GPs looking for fewer dollars to invest. GPs are not able to raise fresh funds are closing down the existing portfolios faster to launch new vehicle. Such funds are now referred to as Zombie funds.

So, what does this mean for Indian market? As per PE firm formation lawyers, as quoted by PE International, some investors are looking for geographic allocation hotwired in the fund investment strategy. China exposure and economics are becoming the biggest considerations. This calls for greater diversifications, where other large Asian countries such as India stands to benefit.

Although China is still the top destination for private equity dealmakers in Asia, its southern neighbor – India – is expected to grow far faster. Investors can blame China’s?Although China is still the top destination for private equity dealmakers in Asia, its southern neighbor – India – is expected to grow far faster. Investors can blame China’s sluggish initial public offering market and Beijing’s crackdowns on technology. Between 2020 and 2021, the value of deals went up 47 percent in India but only 23 percent in China, according to Bain Consulting’s latest Asia-Pacific private equity report. As a result, the Indian market now represents 20 percent of global private investments in Asia.?and Beijing’s crackdowns on technology. Between 2020 and 2021, the value of deals went up 47 percent in India but only 23 percent in China, according to Bain Consulting’s latest Asia-Pacific private equity report. As a result, the Indian market now represents 20 percent of global private investments in Asia.

India also attracts global investors because it is similar to China “in population, growth rates, and state of development,” the report said. In particular, the growth of India’s technology industry mirrors that of China’s before the Chinese government started tightening its grip on tech giants in 2020. In 2021, the Internet and tech sector accounted for 62 percent of the overall deal value in India. Because of the Indian government’s “initiatives to encourage businesses to go digital,” investors will be drawn to the country for the increasing digital penetration, according to Bain. More importantly, while exit environment in China remains unfriendly, India offers a fast growing stock market, greater liquidity, easy IPO rules & listing. In 2021, the IPO reduced by 50% which is not encouraging for new PE investments.

Alvin Tay, Chief portfolio advisor of Mercer, observed that pan-Asian funds' focus to China is reducing and moving to countries such as India. Also, as per Andrew Cook from Clifford Chance, countries such as India, Thailand,Japan and South Korea expects to see significant uptick in the PE Investments.

Given declining attractiveness of PE investments in China, while western market also does not remain as lucrative as in past, India offers great opportunity & profitability with easy exit. Hence, Indian PE market is set to grow faster in 2023.