Investing in India: A Dynamic Market with Diverse Exit Routes for Success

In the fast-paced domain of private equity (PE) investments, the art of crafting a successful exit strategy determines the outcome of an investment. As India's private equity exits surged to a noteworthy USD 24 billion in 2022, the significance of timely exits has become more recognised. Navigating the intricate balance between market conditions, company performance and potential value creation opportunities requires private equity firms to exercise finesse, precision and value-driven strategies.

?In 2022, the global private equity exit was USD 391.44 billion, down 32.1 per cent from 2021 figures. The decline has been attributed to months of macroeconomic turmoil, the lingering effects of the pandemic and interest rates hikes by central banks across the world intended to curb surging inflation. It has led to the global private equity exit value falling by nearly one-third in 2022 compared to 2021’s record year, according to S&P Global.

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Understanding India's exit dynamics

In India, the Indian private equity market has witnessed notable shifts in exit patterns in recent years. Since the 2010s, many high-quality assets with specialised plays and very strong underlying performance have enabled private equity firms to capture the significant value for multiple investors across investment cycles, finds Bain & Company’s India Private Equity Report 2023. Investors with depth in India exposure have witnessed tremendous growth in exit opportunities, with both the secondary and strategic sale markets growing manifold.

?However, in 2022, secondary sales volume in India declined by around 35 per cent, and the public market exit route through Initial Public Offerings (IPOs) came to a halt, as many companies deferred listings. This was very much in line with the global outlook. However, traditional sectors, such as banking, financial services, insurance (BFSI), energy, healthcare and manufacturing experienced growth in the number of follow-on offerings in the public market due to favourable market conditions.

?Among Indian private equity exits, the healthcare sector emerged as one of the focal points, with lots of potential. The importance of healthcare in exits grew significantly in 2022, making up almost 16 per cent of the total exit value, which reached USD 3.5 billion. Notable examples in recent years include exits from Vijaya Diagnostics, Max Healthcare, Medanta Medicity amongst several others.

?The overall exit market has improved considerably in 2023 and seen a notable increase across all the segments.

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Planning an exit strategy

Private equity is a high-stakes sector where delivering market beating returns to limited partners (LPs) is not only a goal, but an imperative to be long term successful. Alternate, and carefully crafted, exit strategies are the cornerstone of this mission, directly influencing the outcome of every firm’s investment journey.

?A successful exit should create value, for all stakeholder, and potentially also help make funds available to the company for future expansions. Despite careful planning and thinking, a poorly executed or not well timed exit can dampen the success of an otherwise excellent deal. Each exit decision thus necessitates meticulous evaluation and thinking, transforming the process into more an art than science.

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Evaluating exit options

Navigating the complex labyrinth of exit strategies in the Indian landscape requires a nuanced understanding of market dynamics, underlying performance, business leadership position and attractiveness, ?and potential valuation. Private equity firms increasingly in India have a variety of exit options to consider when seeking to realise their investments as outlined below.

?One approach is the strategic sale of the portfolio company to another PE firm or to a strategic. Another avenue, and increasingly preferred in India, is the IPO route where the company's shares are offered to the public, potentially yielding substantial returns if market conditions are supportive, and company has a strong position and management team. Several PE players have successfully exited residual, and in several cases large, stakes post listing the company as well. Critical aspect to ensure is the public market participants should benefit from investing in the company and create long term value – this helps private equity firm to build a brand as a strong company builder and benefit on an ongoing basis from public market participants support. Selectively, PE firms have leveraged buy-backs by the company or founders to exit their positions. In case of struggling businesses, there is a rising emergence of special situation and turnaround funds that are open to collaborating with entrepreneurs and private equity firms to provide liquidity to private equity firms and drive further value creation. ?Each exit option presents unique set of advantages and challenges, and a careful evaluation and meticulous execution is essential to ensure a successful outcome for both investors and investee companies.

?In the complex world of private equity, carefully crafting of an exit strategy taking into account company/founder readiness, underlying operational performance, market conditions, and comparable valuation benchmarks, etc. ?is the key for a successful, fair exit. As the Indian private equity landscape continues to evolve, like in any other global large PE market exits are a vital part of the investment journey. Navigating these will require a detailed vision with planning, strategy and a strong drive to achieve value – a lot of which will need to be crafted at the time of the entry itself!!!