Private Equity- A challenging Year Head

Strong capital markets help everyone, including vc and pe funds – as has been happening during the last two years, when many of the pe/vc funds could make exit either by selling it to other pes or selling their stake in the initial public offerings. But despite such a good run in the last two years, India’s pe sector does not stack up well in terms of returns against global pe peers. It’s estimated that total funds raised by India-focused pes have been in the region of $170 billion, of which, till now, $65 billion (the investment value of which would be $35 billion) have been returned to the investo.rs. There are 660 active vc/pe funds operating in India as of 2016-17

It has been perceived that Indian pe industry is doing well. The reason could be that only successful exits are reported in the media, while investments that did not do well never got reported. There are no official data available in the country that give an idea about how India-focused pe industry is doing. Lack of any comparable performance among various pe players is one of the biggest deterrents for the industry. While, globally, hnis are one of the prime subscribers to pe industry, in India, hni participation is said to be far from what it should have been, though data for comparison is not available. Further, there is no organised way to educate hnis about pe products. If the government gets regulators like sebi to make a performance report card available for pe industry, it can help attract higher hni participation.

So, how does the outlook for pe industry appear in 2018? Our senses that it’s not going to be great. The stock market, which was buoyant till recently, now faces headwinds. The year-to-date Indian popular stock index is just at the same level as last year closing. Challenge for an emerging economy is the growth difference between developed market and the emerging market, which has started shrinking, suggesting that many lps may prefer to park funds in developed markets, rather than emerging markets. Technology is one sector that has attracted a big chunk of money from the pes, but the sector is facing its own challenge, as poster-boys like Uber and Facebook have seen their valuation take a beating, suggesting that the benchmark to value tech stocks would come down. Last year, the Indian pe industry did not attract much of primary capital. The general elections, which is due in next 12 months, is another worrying factor for the Indian pe players.

But there are opportunities for pe players too, if they play their cards well. Some of the opportunities for pe players arise from the formalization of Indian economy through the introduction of gst, as also the push for digital transactions. The NCLT process also offers a good opportunity to pe players. With ibc coming in, there has been a behavioral change among promoters as well as banks, which offers another avenue for pe players. Also, the increased penetration of insurance augurs well for the pe industry in terms of attracting primary capital.

The government is also keen to promote this sector, as is evident from this year’s budget speech by the finance minister, in which he had stated that the government is committed to announce policy frameworks that are conducive for growth of venture capital funds and angel investors. But something more needs to be done in this regard. The fact is that many of the policy makers at Delhi have limited understanding of how this industry operates and what the jargons that are being used by the industry mean. This poses some challenges in terms of regulation of policy frameworks.

Going by recent trend, it’s likely that 2018 would be a weak year for the pe industry in terms of exit as well as primary capital.