PE/VC fundings may hit another record this year

“Last year, we saw $75 billion of private equity (PE) and venture capital (VC) investments. And this year, we expect to see over 20% growth on that, driven mainly by continued interest in the TMT (tech, media and telecom) sectors and a strong return of PE investments in infrastructure and real estate,” said Vivek Soni, partner and national leader, PE services, EY.

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“In 2019, infrastructure and realty comprised 40% of PE/VC investments, but the last two years have been comparatively slower. In 2022, we expect a lot more action driven by foreign investors seeking long term yield generating assets,” he added.

The new year is also expected to see the entry of many more large investors on account of the scale and strong exit track record that India has demonstrated. “In 2022, we are projecting newer funds to enter. Primarily because the size and scale of the Indian PE/VC market have grown multiple times, and combined with returns made by investors, it is a difficult market to ignore. PE/ VC as an asset class does well in larger economies, and as the Indian economy grows bigger, PE/VC investments are expected to grow at a disproportionately faster pace,” said Soni.

The scale of the Indian market and economic growth potential will also act as a hedge against withdrawal of surplus liquidity in the global financial markets on account of the US Fed’s tapering of its bond purchase programme and expected interest rate hikes, experts said.

“There is enough liquidity in the system, and what’s good is that corporate earnings growth is sustaining. So even if there is a withdrawal of liquidity after tapering, India will continue to get a disproportionate level of flow. Just like in China, you will see investors withdraw from smaller markets, but this (India) market has become too big now, given the growth it has to offer,” said Manisha Girotra, CEO of investment bank Moelis India.

Girotra said while the consumer technology sector will take away the biggest chunk of the PE/VC pie, ESG (environmental, social and governance) will be the dominant theme of 2022. “A lot more will happen on the ESG front because there are a lot of funds that have allocated capital for clean energy and renewables. So it is going to be a theme for the next three to four years, and we are seeing companies pivot more and more to align themselves with what the world wants to see in terms of ESG, clean energy, sustainable businesses, etc.,” she said.

Experts believe PE dealmaking, especially on buyout side, will see traction in 2022 as global central banks raise interest rates, reducing the beneficial arbitrage that public markets had over private markets.

“While in 2021, liquidity-fuelled stock markets created a situation of valuation arbitrage in favour of public markets, in the second half of 2022, we might see that correct somewhat as liquidity flows reduce due to Fed’s tapering of its bond-buying programme,” Soni said.

Moelis’ Girotra said buyouts are seeing strong traction, and PE investors appear to have the upper hand over corporates when it comes to acquisitions.

“PE, today, is very comfortable to write large cheques because India has become a big market, and they are seeing lots of exits and leverage is easily available. In 90% of the situations where you have a PE competing with a strategic investor, we are seeing PE investors outbid strategic investors,” she said.