venture capital: the private equity and venture capital sector continues to grow with assets under management exceeding $150 billion

India’s private equity (PE) and venture capital (VC) industry continues to grow in size and depth with over 300 funds actively investing in 5,000 companies with assets under management (AUM) exceeding $150 billion. dollars, according to a new report.

Total venture capital/venture capital investment activity in 2021 was $77.1 billion, a 62% increase over 2020 levels. The PE asset class (excluding infrastructure and real estate) showed a growth of 79%, according to a new report released titled “IVCA – EY PE/VC Agenda – India Trend Book 2022” during the IVCA Conclave 2022.

Over the past decade, the composition of private equity/venture capital investments has changed significantly, from primarily minority growth investments to one in which large buyouts have become a significant part of the overall investment pie. in private equity/venture capital (in dollar value). Private equity investors are likely to emerge as a new class of Indian business promoters over the next decade as their adoption of the buyout strategy aligns with mature markets. Additionally, the increasing level of stress in corporate balance sheets over the past decade has provided attractive opportunities for private equity funds to acquire companies with good brands/assets at reasonable valuations.

The infrastructure and real estate sectors have dominated takeover activity over the past decade, accounting for more than 50% of all takeovers by value and 40% by volume. However, in 2021, the technology sector emerged as a favored sector accounting for 57% of takeovers by value and 16% by volume compared to 24% by value and 10% by volume in the previous decade. This trend is in line with the post-pandemic global shift that has seen an increase in investment in the technology sector, driven by accelerating technology adoption by businesses and individuals.

Growth investments have become larger and more complex

Growth investments of US$19.6 billion in 2021 are approximately 14% lower than 2020. However, growth investments in 2020 were supported by mega investments worth $15.1 billion US dollars in the companies of the RIL group. Adjusted for these one-time transactions, growth investments in 2021 are almost 2.5 times the value recorded in 2020 (US$7.8 billion, adjusted value) and more than double the value recorded in all years. previous ones. This growth is explained not only by a higher number of transactions, but also by an increase in the average transaction size. 2021 saw 187 deals, 61% more than 2020 (116 deals) and an average deal size of US$105 million, almost 50% more than previous years except 2020 which had an average deal size of US$105 million. higher transaction average due to mega transactions in RIL group companies.

India is emerging as a leading ecosystem for venture capital investments

2021 was a banner year for venture capital/start-up investments, recording an all-time high of US$28.5 billion, nearly four times the value recorded in 2020 (US$7.3 billion) and almost equal to the total value of VC/seed investments over the previous three years combined. Startups have become the largest deal segment in 2021, accounting for 37% of total private equity/venture capital investments. In deal volume, venture capital/start-up investment deals were the highest ever at 858 deals, up 37% from last year, which saw 628 deals.

As a result of the pandemic, venture capital / start-up investments were among the most affected in 2020, decreasing by 38% on an annual basis (11.7 billion US dollars in 2019) despite the number of transactions down only 8% (628 transactions in 2020 compared to 681 transactions in 2019). After the onset of the pandemic, venture capital/start-up investments dwindled to a trickle (US$238 million in May 2020) as venture capital funds became more risk averse and abstained to invest in start-ups that traditionally had high cash burn rates.

However, as the pandemic progressed, there was an accelerated adoption of e-commerce/tech businesses globally as well as in India, due to the ease of use and convenience it offered. The pandemic has also accelerated the learning curve of e-commerce and technology adoption among the less savvy and new users.

The e-commerce sector is expected to be the fastest growing sector in India

The e-commerce sector has become one of the predominant sectors for PE/VC investments in 2021, registering US$15.9 billion, accounting for 21% of total PE/VC investments in 2021 and more than five times investments received in 2020. PE/ Venture capital investments in e-commerce in 2021 are the highest ever for the sector. The share of e-commerce would be even higher if we were to include other tech-enabled online platform companies like OTT streaming, e-learning, fintech, Logitech, etc. that have been excluded from this analysis (part of the vertical parent sector). After the onset of the pandemic, amid the ensuing uncertainty, venture capital/private equity investments in e-commerce dwindled to a trickle (US$32 million in May 2020) as funds became more risk averse and refrained from investing in e-commerce businesses that traditionally had high cash burn rates. However, as the pandemic progressed, there was an accelerated adoption of e-commerce globally as well as in India, due to the ease of use and convenience it offered. The pandemic has also accelerated the learning curve of e-commerce and technology adoption among the less savvy and new users.

Established e-commerce businesses experience multiple rounds of investments, in a short period of time, at increasingly higher valuations. As a result, many large established players have now amassed a significant warchest to further accelerate both organic and inorganic growth. This also favors the consolidation of the sector.

Interest was high not only among private equity investors, but also among public equity investors, as evidenced by the strong response to recent IPOs of e-commerce platforms such as Zomato, Policybazaar, Nykaa, etc. Investor interest in e-commerce has been so great that in the past investors have re-entered positions with their former beneficiaries at higher valuations, after having completely exited it in the past, as seen during the latest round of US$3.6 billion funding in Flipkart by Softbank, Tiger Global and others.

In B2C (business-to-consumer) e-commerce, traditional horizontal formats like Flipkart, as well as specialized vertical formats like Pepperfry, Urban Ladder, Firstcry, and hybrid B2B/B2C models like Mogilix have seen significant PE/VC investments. Additionally, the emergence of influencer-led marketing and brand building and social media has led to the emergence of a new segment of the B2C model called D2C (direct-to-consumer) driven by brands like MyGlamm, WoW Skin Science, Mamaearth, etc. are attracting strong interest from investors. The pandemic has also boosted demand for hyperlocal food delivery and grocery platforms like Swiggy, Zomato, Bigbasket, Blinkit, etc., thereby increasing their GMVs and valuations.

Another beneficiary of the pandemic has been healthcare delivery which has seen faster adoption of telemedicine as well as increased penetration of online pharmacy platforms which have really upped their game by ensuring availability of SKUs, competitive prices and faster delivery to challenge the dominance of local pharmacies. The pandemic has widened the chasm between the strongest and mid-tier players, and propelled the most important players into another orbit, which are now leading to consolidation in each of their respective sub-segments. Young demographics, growing internet and smartphone penetration, and relatively better economic performance are some of the major drivers for this sector. The growth of e-commerce will also boost related industries such as logistics, supply chain, agri-tech and omni-channel retail solutions, which have already received larger investments in 2021.

“As India moves towards its aspiration to achieve a US$5 trillion economy, India’s PE/VC industry has an important role to play. India’s PE/VC investment activity could cross the $100 billion threshold within a few years, making it one of the largest PE/VC markets in the world outside of the US and China,” said Renuka Ramnath, President, IVCA, Founder, Director. Director and CEO, Multiples Alternate Asset Management Pvt. ltd.


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