Private Equity & Startups – Bullish Trends?

Recently edtech unicorn BYJU’S raised a mammoth $400m approx. in latest funding from a private equity round, led by Canada’s CPP Investment Board, Naspers Ventures, General Atlantic and few existing investors in December this year. The company’s valuation is at nearly $4b now, making it the fourth most valuable start-up in India, after Paytm, Ola, and Oyo Rooms.

With the Indian startup ecosystem maturing gradually, the role of private equity garners vivid interest and prominence. This is a positive cue as it empowers global expansion plans of Indian startups and creates new vistas in global markets. 

2018 has witnessed investments aggregate to a whopping $27b till November this year, with $26.6b worth of exits including $16b of Flipkart. Thanks to the recent $16b blockbuster Flipkart-Walmart deal, investor optimism undoubtedly received a major boost this year. The deal confirmed huge potential of Indian startups. Interest of global investors in Indian internet and mobile companies shot up almost dramatically. It also increased the transaction size of investments. Additionally, fundraising for higher rounds has become easier due to increased investor liquidity in the market post the deal. The deal was also the first public divestment by Japanese conglomerate SoftBank’s Vision Fund which helped improve its Q1 operating profit. The increase in late-stage investments including Series C, D, E and F shows reinvigorated interest and confidence by investors world wide in the Indian startup ecosystem to accelerate the momentum of growth of startups. 

Assorted Players 

Well, the PE industry can have quite the wow moment in India. While global giants such as Blackstone, Carlyle, KKR, Apollo, Warburg Pincus, Bain and TPG have thus far dominated this domain, Indian business families are getting serious about PE investing. There are a number of larger groups and financial players in sponsored PEs including Aditya Birla PE, Tata Capital, Motilal Oswal, Kotak, Mahindra Partners. It is refreshing to observe the rise of Indian startups as well in this sector. Multiples, Everstone, Kedaara and True North are a few names working in this space.

It is encouraging to find an increase in high profile fund managers with sound pedigree working to set up their own PE funds in the country.

Independent home-grown PE funds and home-grown investors attracting global and local capital flows can further strengthen the Indian PE industry. As Indian startups transition to maturity, these fund managers can leverage their profound experience to act as catalysts to create value in the eco system and avoid the cookie cutter approach adopted by global funds. 

These varied options could change the PE game in significant ways in the country. 

PE Boom

The momentum of funding activity in India continues to grow robust. 2018 is indeed emerging to be a great year with a strong rebound for investments and increase in fund raising. Exit activity is also vigorous this year assisted by active secondary and strategic deal engagements. Furthermore, the value of buyouts has increased since last couple of years. 

Notable deals in this year included $1743m investment in Global Logic by GIC Pvt Ltd, Azim Premji Foundation, PI Opportunities, KKR and few others, $451m in Paytm by Alibaba group holding ltd, SoftBank Vision Fund LP, GIC and TFL Pension Fund’s $159m investment in Kotak Mahindra Bank and India Resurgent Fund’s $156m investment in Archean Chemical Industries. Other large deals included investment of $1.3b in the Africa business of Bharti Airtel by Warburg Pincus, Temasek, SoftBank and a few other investors for a 28.4% stake, and the large $1b Blackstone-Intelenet Global deal. 

Private equity investors led by US based Warburg Pincus LLC acquired a significant minority stake in Fusion Microfinance, the New Delhi-based mid-sized non-banking financial company (NBFC) for Rs.520 Cr ($75m). This is Warburg’s second investment in financial services space in 2018 in India, after its acquisition of 26% stake in IndiaFirst Life Insurance in June and first investment in microfinance sector. With more than $45b in assets under management globally, Warburg Pincus' major India portfolio include CarTrade, Ecom Express, Gangavaram Port, Kalyan Jewellers, PVR, Rivigo, Quikr and Lemon Tree. It has invested in NBFCs such as AU Financiers and Capital First Ltd. 

Major buyouts included Temasek’s buyout of SP Infocity IT Park from CPPIB and Shapoorji Pallonji for $353m, PE fund Xander’s $350m buyout of Phoenix’s Hyderabad office project and Advent’s $326m buyout of Manjushree Technopack. 

PE firm TPG also announced plans recently to raise its second social impact fund after the success of Rise, a $2b fund for social impact raised by the company in 2016. Rise, is now 75 percent invested, with stakes in companies ranging from online education startups to an Indian dairy company. TPG has also devised an impact measure to evaluate potential Rise investments and avoid greenwashing. 

PE veteran Ajay Relan’s new fund, Xponentia Capital Partners, which invests in mid-market growth companies, is in talks to invest $10m in pilot training institute Flight Simulation Technique Centre (FSTC). In August this year, private equity firms Samara Capital and Xponentia acquired express logistics firm, Spoton Logistics, in a ?550 Cr deal with India Equity Partners. 

There is visible optimism in the air. 

Are Indian startups going to witness a surge in PE investments?

Is the ecosystem transitioning towards mature market standards? 

Unicorns Boost 

2018 is turning to be a particularly positive year for unicorns. A bevy of Indian startups including Zomato, Swiggy, BYJU'S, PolicyBazaar, Freshworks, OYO and Udaan joined the elite billionaire club in the span of just a few months. The year also saw a large number of startups raising over $100m, with OYO topping the chart with $1b. As number of unicorns grows, bullish trends are inevitable with push towards more investments, increase in deal sizes and number of deals. Companies in the growth stage that show positive trajectory, solid fundamentals, good unit economics, real value, local digitisation, undoubtedly will be the prize winners. 

Is this the beginning of new era of PE industry in India?

India, the fastest growing economy in the world with a vibrant startup ecosystem, is a very lucrative destination for private equity players. Large deals in investments and exits this year have resulted in exits closely matching the value of investments, a significant deviation from previous years where exits were generally lower than investments by over 50%. 

Can the PE industry in India show exits bigger than investments to boost LP confidence? 

Will 2019 prove to be the inflection point for PE industry in India? 

Can Indian PE industry evolve to pave the way to create a holistic startup ecosystem in the country?