Investors are increasingly looking at India’s healthcare sector for secular returns amidst turbulent tides, with an increase in interest in health providers, pharma, diagnostics, and single-specialty providers since 2020.
NEW DELHI (India CSR): According to Bain & Company’s annual ‘India Private Equity Report 2023,’ India’s private equity saw investments of $61.6 billion in 2022, indicating a 12% moderation from the peak value of $69.8 billion in 2021.
ESG investments emerged as a breakout theme in 2022, with clean energy and electric vehicle investments leading the way, reaching nearly $7.9 billion, and traditional sectors, including BFSI, healthcare, energy, and manufacturing, grew by 50% to around $28 billion, thanks to strong domestic consumer sentiment.
Prabhav Kashyap, Partner and co-author of the report stated that ESG has evolved into a key driver of dealmaking, and ESG-aligned investments reached nearly 13% of the total PE-VC investments in 2022.
Clean Energy and Electric Mobility Drive ESG Investments
ESG (Environmental – Social – Governance) investments were mainly concentrated in clean energy and electric mobility, which accounted for 90% of the $19.2 billion invested in ESG from 2018 to 2022.
The solar energy sector saw strong deal activity in 2022, with investments of $5 billion, supported by increasing cost competitiveness of solar against thermal energy, regulatory tailwinds, and an acceleration in the climate agenda.
The electric mobility segment is also growing and has attracted more than $4 billion in investments since 2018, and the sector is gaining traction driven by an increasingly favorable TCO.
Ronika Sapra, Associate Partner and co-author of the report stated that EV 2Ws are expected to see increasing penetration as they become increasingly cost-competitive with around 40-45% lower total cost of ownership compared to ICE.
Tempered Outlook for 2023
2022 was a year of recalibration for PE-VC investments in India, and the outlook for 2023 is tempered due to the slowdown in the private investments ecosystem.
While the first half of 2022 continued the momentum of 2021, the second half of the year saw a shift in the mix of deals, with mid-sized and small-sized deals gaining a share in the overall deal value. Megadeal activity, including buyouts, will stay muted for a large part of 2023 due to gaps in valuation expectations and tighter credit markets.
Continuing Interest from Investors
Despite the short-term downturn, India continues to be an attractive destination for investors, especially from SWFs and LPs looking to deploy funds. While funds may adopt a cautious approach in 2023, the Indian opportunity remains strong, with traditional sectors and ESG-themed investments continuing to ride on robust consumer sentiment. Structured deals may see a pace in consumer tech, and a shift in deal flow is anticipated, with a drawdown in the number of mega deals and an increased focus on profitability for portfolio companies as funds focus inward.
India’s Rising Share in Private Equity and Venture Capital Investments
India’s share of private equity and venture capital (PE-VC) investments in Asia-Pacific grew from around 15% to approximately 20% from 2021 to 2022. The growth was driven by China + 1 tailwinds and India’s macro robustness, making it a bright spot for investing amidst decelerating capital flow in the region.
Over the past decade, private equity in India has witnessed remarkable growth, from an investor base of 200 to more than 800 active investors, along with an expansion in exit opportunities.
Dealmaking and exits: A Year of Reckoning
- 2022 was a year of recalibration for PE-VC investments in India, declining from the record highs of $70 billion in 2021 to $62 billion in 2022 amid global headwinds. Structural enablers helped India surpass $60 billion in investments for a third time in a demonstration of resilience.
- India’s share of Asia-Pacific grew from ~15% to ~20% in a single year, as China + 1 tailwinds and India’s macro robustness made the country a bright spot for investing amidst decelerating capital flow in the region.
- Like other major economies, Indian PE-VC activity was a tale of two halves through the year—shifting from record dealmaking of $40 billion in the first half to a dip in deal value to $21 billion in the second half, marked largely by a drawdown in VC cheque sizes and a shift in the deal mix.
- The year saw sustained deal volumes with small-sized deals (less than $100 million) contributing a larger share of overall deal flow (from 24% to 31%). Blockbuster deals (greater than $1 billion) in VC and private equity buyouts saw significant deceleration.
- IT/ITeS buyouts, commanding a share of $10 billion of the all-time high in buyout value of $16 billion in 2021, contracted as multiple IT sector deals failed to close due to a mismatch in valuations. The increasing cost of credit and rise in hedging costs also put a damper on buy-out activity.
- Traditional sectors like BFSI, energy, healthcare, and manufacturing grew by around 50% in 2022 due to robust domestic demand. Consumer tech faced challenges amidst uncertainty in business models and unit economics while IT/ITeS (IT Services) faced challenges in export demand driven by an uncertain global environment, with an investment value in the sectors declining by 60% to 70%.
- Exit activity slowed in 2022 to $24 billion across all modes of exit after an all-time high of $36 billion in 2021, but surpassed activity seen pre-2021. Traditional sectors dominated the share of exits greater than $100 million, with healthcare and manufacturing showing the largest increase in exit value.
A Shift in Deal Flow Expected in 2023
A shift in deal flow is anticipated in 2023, with a focus on profitability for portfolio companies and a drawdown in the number of mega deals. Megadeal activity, including buyouts, is expected to stay muted for a large part of the year due to gaps in valuation expectations and tighter credit markets. Traditional sectors and ESG-themed investments are expected to continue to ride on robust consumer sentiment, while structured deals may see pace in consumer tech.
Conclusion
The Bain & Company’s annual ‘India Private Equity Report 2023‘ indicates that ESG investments in India have evolved into a key driver of dealmaking, and clean energy and electric mobility have emerged as the leading themes.
Despite the short-term downturn, India remains an attractive destination for investors, with a shift in deal flow anticipated in 2023 toward profitability for portfolio companies and a drawdown in mega deals.
Traditional sectors and ESG-themed investments are expected to continue to thrive, with structured deals potentially seeing pace in consumer tech.
(Copy Right @ India CSR)
